1. Money Market Hedge on Receivables. Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge. Be precise.
2. Money Market Hedge on Payables. Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7% over 180 days, and the spot rate of the Mexican peso is $.10. Suggest how the U.S. firm could implement a money market hedge. Be precise.
3. Hedging with Forward Contracts. Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract.
Explain how a U.S. corporation could hedge payables in Canadian dollars with a forward contract.
4. Benefits of Hedging. If hedging is expected to be more costly than not hedging, why would a firm even consider hedging?
5. Hedging Payables. Assume the following information:
90 day U.S. interest rate = 4%
90 day Malaysian interest rate = 3%
90 day forward rate of Malaysian ringgit = $.400
Spot rate of Malaysian ringgit = $.404
Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
In comparison, the firm will pay out $120,000 in 90 days if it uses the forward hedge and $122,377 if it uses the money market hedge. Thus, it should use the forward hedge.
6. Hedging Decision on Receivables. Assume the following information:
180 day U.S. interest rate = 8%
180 day British interest rate = 9%
180 day forward rate of British pound = $1.50
Spot rate of British pound = $1.48
Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.
7. Currency Options. Relate the use of currency options to hedging net payables and receivables. That is, when should currency puts be purchased, and when should currency calls be purchased? Why would Cleveland, Inc., consider hedging net payables or net receiv¬ables with currency options rather than forward contracts? What are the disadvantages of hedging with currency options as opposed to forward contracts?
8. Forward versus Options Hedge on Payables. If you are a U.S. importer of Mexican goods and you believe that today's forward rate of the peso is a very accurate estimate of the future spot rate, do you think Mexican peso call options would be a more appropriate hedge than the forward hedge? Explain.
9. Forward versus Options Hedge on Receivables. You are an exporter of goods to the United Kingdom, and you believe that today's forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to hedge your British pound receivables in some way. Would a forward hedge or a put option hedge be more appropriate? Explain.