Question

Mattel Toys.  Mattel is a​ U.S.-based company whose sales are roughly​ two-thirds in dollars​ (Asia and the​ Americas) and​ one-third in euros​ (Europe). In​ September, Mattel delivers a large shipment of toys​ (primarily Barbies and Hot​ Wheels) to a major distributor in Antwerp. The​ receivable, €32 ​million, is due in 90​ days, standard terms for the toy industry in Europe.​ Mattel's treasury team has collected the following currency and market quotes in the popup​ window: The​ company's foreign exchange advisors believe the euro will be at about ​$1.4219​/€ in 90 days.​ Mattel's management does not use currency options in currency risk management activities. Assume a​ 360-day financial year.

Current spot rate ​($/€​)	​$1.4145
Credit Suisse​ 90-day forward rate ​($/€​)	​$1.4185
Barclays​ 90-day forward rate ​($/€​)	​$1.4181
Mattel Toys WACC​ ($)	10.050​%
​ 90-day eurodollar interest rate	4.130​%
​ 90-day euro interest rate	3.725​%
​ 90-day eurodollar borrowing rate	5.137​%
​ 90-day euro borrowing rate	5.144​%

a. How much in U.S. dollars will Mattel receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the current spot rate of $1.4145​/€​? The Credit Suisse forward rate of ​$1.4185​/€​? The Barclays forward rate of $1.4181/€​? The expected spot rate of ​$1.4219​/€​?

b. How much in U.S. dollars will Mattel receive in 90 days if the accounts receivable is covered by the Credit Suisse​ 90-day forward​ contract? The Barclays​ 90-day forward​ contract?

c. How much in U.S. dollars will Mattel receive in 90 days with a money market​ hedge?  

d. Advise Mattel on which hedging alternative is probably preferable.                                      

Answer 1

(a) How much in US dollar will Mattal receive in 90 days without a hedge

if Expected spot rate in 90 days is same as Current spot rate of $1.4145/€:

Amount received in dollars = 3,20,00,000×1.4145 = $4,52,64,000

if Expected spot rate in 90 days is same as credit Suisse forward rate of $1.4185/€

Amount received in dollars = 3,20,00,000×1.4185 = $4,53,92,000

if Expected spot rate in 90 days is same as Barclays forward rate of $1.4181/€

Amount received in dollars = 3,20,00,000×1.4181 = $4,53,79,200

if Expected spot rate in 90 days is $1.4219/€

Amount received in dollars = 3,20,00,000×1.4219 = 4,55,00,800

(b) How much in US dollar will Mattal receive if accounts receivable is covered by credit Suisse forward rate of $1.4185/€

Amount received in dollars = 3,20,00,000×1.4185 = $4,53,92,000

if accounts receivable is covered by Barclays forward rate of $1.4181/€

Amount received in dollars = 3,20,00,000×1.4181 = $4,53,79,200

(c) How much will Mattal receive in 90 days with Money Market Hedge:

In case of accounts receivable, strategy to be followed in money market hedge is Borrow - Buy - Invest

Step1: Borrow present value of €3,20,00,000 in Europe @5.144% for 90 days

Present value = 3,20,00,000÷(1+0.05144) = €3,04,34,452

Step 2: Buy €3,04,34,452 in US spot market @1.4145

$ inflow = 3,04,34,452×1.4145 = $4,30,49,532

Step 3: Invest $4,30,49,532 in US @10.050% for 90 days

$ inflow after 90 days = 4,30,49,532×(1+(0.1005×90÷360)) = $4,41,31,151

(d) Which hedging alternative is preferable:

Amount received under credit Suisse forward cover = $4,53,92,000

Amount received under Barclays forward cover = $4,53,79,200

Amount received under Money Market Hedge = $4,41,31,151

Conclusion: As $ inflow under credit Suisse forward cover is higher, it is preferable.