The evaluation and recommendations are based on extensive use of financial ratios and analytical tools.
It is considering an order from a Japanese supplier that requires a payment of Blades has two choices: The futures price on yen has historically exhibited a slight discount from the existing spot rate. However, the firm would like to use currency options to hedge payables in Japanese yen for transactions two months in advance.
Blades would prefer hedging its yen payable position because it is uncomfortable leaving the position open given the historical volatility of the yen. Nevertheless, the firm would be willing to remain unhedged if the yen becomes more stable someday.
He would like to use an exercise price that is about 5 percent above the existing spot rate to ensure that Blades will have to pay no more than 5 percent above the existing spot rate for a transaction two months beyond its order date, as long as the option premium is no more than 1.
In general, options on the yen have required a premium of about 1.
As an analyst for Blades, you have been asked to offer insight on how to hedge. Use a spreadsheet to support your analysis of questions 4 and 6. Should Blades allow its yen position to be unhedged?
Given this information, what is the expectation on the order date of the yen spot rate by the delivery date? Your answer should consist of one number.
Assume that the firm shares the market consensus of the future yen spot rate. Given this expectation and given that the firm makes a decision i. Will the choice you made as to the optimal hedging strategy in question 4 definitely turn out to be the lowest-cost alternative in terms of actual costs incurred?
Why or why not? Based on your assessment, you believe it is highly unlikely that the future spot rate will be more than two standard deviations above the expected spot rate by the delivery date.
Based on this expectation of the future spot rate, what is the optimal hedge for the firm? Summarize the case study and explain the factors that affect foreign exchange rates.Tempaper self-adhesive, removable wallpaper provides a fun, high-impact look.
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