Reference no: EM133015758

Question - Chronos Time Pieces of Boston exports watches to many? countries, selling in local currencies to stores and distributors. Chronos prides itself on being financially conservative. At least? 70% of each individual transaction exposure is? hedged, mostly in the forward? market, but occasionally with options.? Chronos' foreign exchange policy is such that the? 70% hedge may be increased up to a? 120% hedge if devaluation or depreciation appears imminent. Chronos has just shipped to its major North American distributor. It has issued a? 90-day invoice to its buyer for €1,640,000. The current spot rate is ?$1.2224?/€?, the? 90-day forward rate is ?$1.2285?/€. ?Chronos' treasurer, Manny? Hernandez, has a very good track record in predicting exchange rate movements. He currently believes the euro will weaken against the dollar in the coming 90 to 120? days, possibly to around ?$1.1598?€.

a. Evaluate the hedging alternatives for Chronos if Manny is right? (Case 1: ?$1.1598?/€?) and if Manny is wrong? (Case 2: $1.2687/€?). What do you? recommend?

b. What does it mean to hedge? 120% of a transaction? exposure?

c. What would be considered the most conservative transaction exposure management policy by a? firm? How does Chronos? compare?