Question

Use for Math 1 and 2:

Spot Rate                                                                    1.050 – 51 Sf/E

Forward (6 month)                                                     1.060-61 Sf/E

Swiss Rates  (annualized)       Invest / Borrow           8% / 10%

Euro Rates (annualized)         Invest / Borrow           4% / 6.00%

1. Renault is a European importer who wants to hedge 400,000 sf exposure. Hedge it using the forward rate hedge, and the money market hedge.

Answer 1

Fwd Rate:

Fwd Rate 1 Euro = 1.060 - 1.061 SF

Thus as We are European Importer, We need to sell Euro and buy SF to pay vendor.

Thus Bid Rate is relevant

1 Euro = 1.060

Amount required = 400,000 / 1.060

= Euro 377,358.49

Money Market Hedge:

Step 1:

Invest in SF whose future will be 400000 SF in 6 months.

= 400000 SF / 1.04

= SF 384,615.38

AMount of Loan required in Euro for SF 384,615.38

= 384615.38 / 1.050

= Euro 3,66,300.37

Maturity value of Loan in Euro after 6 Months

= 366300.37 * 1.03

= 3,77,289.38

As per Fwd rate - Euro 377,358.49

As per MMH - Euro 3,77,289.38

MMH is suggested as it has lesser outflow

Pls comment, if any further assistance is required