This would allow the company some upside potential, while guaranteeing proceeds at least $1 million greater than the minimum for simply buying a put as above.
Buy/Sell Options DM/$ Spot Put Payoff
1.60 (1,742,846) 1.61 (1,742,846) 1.62 (1,742,846) 1.63 (1,742,846) 1.64 (1,742,846) 1.65 (1,742,846) 1.66 (1,742,846) 1.67 (1,742,846) 1.68 (1,742,846) 1.69 (1,742,846) 1.70 (1,742,846) 1.71 (1,742,846) 1.72 (1,742,846) 1.73 (1,742,846) 1.74 (1,742,846) 1.75 (1,742,846) 1.76 (1,742,846) 1.77 (1,742,846) 1.78 (1,742,846) 1.79 (1,742,846) 1.80 (1,742,846) 1.81 (1,742,846) 1.82 (1,742,846) 1.83 (1,742,846) 1.84 (1,742,846) 1.85
(1,742,846)
“Put” Profits 0 0 0 0 0 60,606,061 60,240,964 59,880,240 59,523,810 59,171,598 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529
Call Payoff 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846 1,742,846
“Call” Profits
60,716,454 60,716,454 60,716,454 60,716,454 60,716,454 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net Profit
60,716,454 60,716,454 60,716,454 60,716,454 60,716,454 60,606,061 60,240,964 59,880,240 59,523,810 59,171,598 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529 58,823,529
Since the firm believes that there is a good chance that the pound sterling will weaken, locking them into a forward contract would not be appropriate, because they would lose the opportunity to profit from this weakening. Their hedge strategy should follow for an upside potential to match their viewpoint. Therefore, they should purchase sterling call options, paying a premium of:
5,000,000 STG x 0.0176 = 88,000 STG.
If the dollar strengthens against the pound, the firm allows the option to expire, and buys sterling in the spot market at a cheaper price than they would have paid for a forward contract; otherwise, the sterling calls protect against unfavorable depreciation of the dollar.
Because the fund manager is uncertain when he will sell the bonds, he requires a hedge which will allow flexibility as to the exercise date. Thus, options are the best instrument for him to use. He can buy A$ puts to lock in a floor of 0.72 A$/$. Since he is willing to forego any further currency appreciation, he can sell A$ calls with a strike price of 0.8025 A$/$ to defray the cost of his hedge (in fact he earns a net premium of A$ 100,000,000 x (0.007234 – 0.007211) = A$ 2,300), while knowing that he can’t receive less than 0.72 A$/$ when redeeming his investment, and can benefit from a small appreciation of the A$.
Example #3:
Problem: Hedge principal denominated in A$ into US$. Forgo upside potential to buy floor protection. I. Hedge by writing calls and buying puts
1) Write calls for $/A$ @ 0.8025
Buy puts for $/A$ @ 0.72
# contracts needed = Principal in A$/Contract size
100,000,000A$/100,000 A$ = 100
2) Revenue from sale of calls = (# contracts)(size of contract)(premium)
$75,573 = (100)(100,000 A$)(.007234 $/A$)(1 + .0825 195/360) $75,332 = (100)(100,000 A$)(.007211 $/A$)(1 + .0825 195/360)
3) Total cost of puts = (# contracts)(size of contract)(premium) 4) Put payoff
If spot falls below 0.72, fund manager will exercise put If spot rises above 0.72, fund manager will let put expire
5) Call payoff
If spot rises above .8025, call will be exercised If spot falls below .8025, call will expire See following Table for net payoff
“Put”
Put Payoff
(75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332) (75,332)
Principal
72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 72,000,000 73,000,000 74,000,000 75,000,000 76,000,000 77,000,000 78,000,000 79,000,000 80,000,000 0 0 0 0 0
Call Payoff
75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573 75,573
“Call” Principal 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
80,250,000 80,250,000 80,250,000 80,250,000 80,250,000
Net Profit
72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 72,000,241 73,000,241 74,000,241 75,000,241 76,000,241 77,000,241 78,000,241 79,000,241 80,000,241 80,250,241 80,250,241 80,250,241 80,250,241 80,250,241
6) Net payoff
Australian Dollar Bond Hedge Strike Price 0.60 0.61 0.62 0.63 0.64 0.65 0.66 0.67 0.68 0.69 0.70 0.71 0.72 0.73 0.74 0.75 0.76 0.77 0.78 0.79 0.80 0.81 0.82 0.83 0.84 0.85
4. The German company is bidding on a contract which they cannot be certain of winning. Thus, the need to execute a currency transaction is similarly uncertain, and using a forward or futures as a hedge is inappropriate, because it would force them to perform even if they do not win the contract.
Using a sterling put option as a hedge for this transaction makes the most sense. For a premium of:
12 million STG x 0.0161 = 193,200 STG,
they can assure themselves that adverse movements in the pound sterling exchange rate will not diminish the profitability of the project (and hence the feasibility of their bid), while at the same time allowing the potential for gains from sterling appreciation.
5. Since AMC in concerned about the adverse effects that a strengthening of the dollar would have on its business, we need to create a situation in which it will profit from such an appreciation. Purchasing a yen put or a dollar call will achieve this objective. The data in Exhibit 1, row 7 represent a 10 percent appreciation of the dollar (128.15 strike vs. 116.5 forward rate) and can be used to hedge against a similar appreciation of the dollar.
For every million yen of hedging, the cost would be: Yen 100,000,000 x 0.000127 = 127 Yen.
To determine the breakeven point, we need to compute the value of this option if the dollar appreciated 10 percent (spot rose to 128.15), and subtract from it the premium we paid. This profit would be compared with the profit earned on five to 10 percent of AMC’s sales (which would be lost as a result of the dollar appreciation). The number of options to be purchased which would equalize these two quantities would represent the breakeven point.
Example #5:
Hedge the economic cost of the depreciating Yen to AMC.
If we assume that AMC sales fall in direct proportion to depreciation in the yen (i.e., a 10 percent decline in yen and 10 percent decline in sales), then we can hedge the full value of AMC’s sales. I have assumed $100 million in sales.
1) Buy yen puts
# contracts needed = Expected Sales *Current ￥/$ Rate / Contract size 9600 = ($100,000,000)(120￥/$) / ￥1,250,000 2) Total Cost = (# contracts)(contract size)(premium) $1,524,000 = (9600)( ￥1,250,000)($0.0001275/￥) 3) Floor rate = Exercise – Premium
128.1499￥/$ = 128.15￥/$ - $1,524,000/12,000,000,000￥
4) The payoff changes depending on the level of the ￥/$ rate. The following table summarizes the
payoffs. An equilibrium is reached when the spot rate equals the floor rate.
国际财务管理(英文版)课后习题答案9
