Reference no: EM133127425

Question 1- We are Bechtel, a private US construction firm. We bid to develop the airport and the surrounding area for Thailand. We are not sure whether the Thai transportation authorities will grant us the business, but we hope they will. If we are awarded the contract, for which we bid $ 1 billion, we shall need to buy Thai materials and labor for 2 years. Assume that the purchases we need to make are in one year. The project will be completed in two years from the present. We expect the Thai bhat will revalue in the next 2 years, but we do not know definitely. We have two choices. One is to hedge and paying for the labor and materials in the one yeas, and the other is to leave an open position.

The data we have are the following. The Spot ER, forward ER now and actual spot rate in one year are 24, 30 and 27 bhat per $. The call and put option premia on bhat and dollars for exercise prices of 30 bhat per dollar and 25 bhat per $ are 2% and 1% of the value. The time period of the options is one year.

Analyze what the best solution is. Show it:
a- Mathematically
b- Explain the answer.

Question 2- We have 100 million South African rand that is payable in one year (we have to pay it to a South African company from whom we imported.) Assume the spot exchange rate is 10.05 rand equal one US dollar. Also, assume that the forward exchange rate is 10 rand equal one dollar. We expect the future spot rate to be 9.8 rand per $1. Furthermore, calls cost .03( 3%) and puts cost .01(1%). The exercise price of the options is 10 rand per dollar and 11 rand per dollar for both types of options.

Expound on how to hedge the exposure. Moreover, the market expectation is that the rand will appreciate against the dollar. We want to implement transactions exposure hedging.
Ascertain that we use 1) a forward contract, or an options approach.
Analyze what the best solution is. Show it:
a- Mathematically
b- Explain the answer.

Question 3- We have 100 million South African rand that is payable in one year (we have to pay it to a South African company from whom we imported.) Assume the spot exchange rate is 10.05 rand equal one US dollar. Also, assume that the forward exchange rate is 10 rand equal one dollar. We expect the future spot rate to be 9.8 rand per $1. Furthermore, calls cost .03( 3%) and puts cost .01(1%). The exercise price of the options is 10 rand per dollar and 11 rand per dollar for both types of options.

Expound on how to hedge the exposure. Moreover, the market expectation is that the rand will appreciate against the dollar. We want to implement transactions exposure hedging.
We want to hedge via:
1) risk sharing
2) leading and lagging
3) currency swaps.
Analyze what the best solution is. Show it:
a- Mathematically
b- Explain the answer.

Question 4- There is a receivable in Mexican pesos of 50 million. Presuppose the Spot rate now, spot rate in one year and forward rate now are 25, 24 and 22 MXN/$, respectively. The premium for calls of an exercise price of MXN/$ 20, 22 and 24 is 2%. The premium for puts of strike price MXN/$ 20, 22, 25 is 1.5%. Hedge through the forward and options market.
Analyze what the best solution is. Show it:
a- Mathematically
b- Explain the answer.