Acme is a UK multinational with subsidiaries in Spain, Hong Kong and
the USA. Transactions within the group have historically been in all
of the currencies of the countries where the companies are located and
have not been centrally coordinated, with the currency of the
transaction varying in each deal. Transactions due in approximately
three months time are shown below. All receiptes and payments are in
thousand units of the specified currencies.
Assume that it is now mid-June:
Payments (read down)
Receipts (read acrsoss) UK Spain Hong Kong
USA
UK E210 $HK720
$US110
Spain &100 E80
Hong Kong $HK400
USA $US430 E120 $HK300
Exchange rates:
$US/& Euro/& $HK/&
Spot: 1.4358-1.4366 1.6275-1.6292
11.1987-11.2050
3 months forward 1.4285-1.4300 1.6146-1.6166
11.1567-11.1602
Note: The HK Dollar is pegged against the US dollar
Interest rates available to NTC and its subsidiaries (annual %):
Borrowing Investing
UK 6.9% 6.0%
Spain 5.3% 4.5%
Hong Kong NA 6.1%
USA 6.2% 5.4%
Currency options
Philadelphia Stock exchange &/$ options, &31,250 contracts. Premium is
in cents per &
Calls Puts
Exercise price July August September July August
September
1.42 1.42 2.12 2.67 0.68 1.42
2.15
1.43 0.88 1.60 1.79 1.14 1.92
3.12
1.44 0.51 1.19 1.42 1.77 2.51
4.35
Option premiums are payable upfront. Contracts may be assumed to
expire at the end of the relevant month.
Questions:
1. The parent company is proposing that inter-company payments should
be settled in sterling via multilateral netting. Demonstrate how this
policy would reduce the number of transactions. (Foreign exchange spot
mid-rates may be used for this purpose)
2. If payments were to continue to be made in various currencies,
illustrate three methods by which the UK parent company might hedge
its transaction exposures for the next three months. Discuss, showing
relevant calculations, which method should be selected. Include in
your discussion an evaluation of the circumstances in which currency
options would be the preferred choice. (note, ACME wishes to minimize
the transaction costs of hedging).
3. Acme has been approached by a Russian company that wishes to
purchase goods from NTC plc in exchange for wheat. The Russian
currency is not freely convertable. Discuss the potential advantages
and disadvatages of such countertrade to Acme. |
