Question

The company hedges using a forward contract 1815 Gallons * BRL 90.15 = 163,622 Exchange Rate...

The company hedges using a forward contract

1815 Gallons * BRL 90.15 = 163,622

Exchange Rate = 0.4227

Convert to USD = $69,163.02

Interest Rate of USD = 0.0215

Present Value in USD = $67,707.31

         

The company using the money market.

1815 Gallons * BRL 90.15 = 163,622

Interest Rate of BRL = 0.065

BRL to borrow = 153,635.68

Exchange Rate = 0.4368

Covert to USD = $67,108.07

Present Value in USD = $67,108.07

1- Bedsides the forward and money market, long option on $ is another way to hedge the currency risk. Assume the option strike price is $0.4010/Real and 1% fee paid upfront. If the spot exchange rate in 3 months is $0.4234/Real, what is the present option value of the sale?

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Answer #1

at the end of 3 months spot exchange rate is $0.4234/ Real and Option Strike price is $0.4010/Real. so the BRL that is going to be received after 3 months will be sold at $0.4234 per real because we would get higher value of USD in market than exercising the call option .

Thus cash flow after 3 months = Spot exchange rate * Receivables

cash flow after 3 months = 0.4234 * 163622

cash flow after 3 months = $69277.55

Present value of USD = Cash Flow * 1 / (1 + 3 month interest) - Premium paid

Present value of USD = 69277.55 * 1 / (1 + 0.0215) - 163622 * 0.4010*1%

Present value of USD = 67819.44 - 656.12

Present value of USD = 67163.32

Please upvote if satisfied

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