Question

Tektronix, Inc. (TEK) is an MNE based in Beaverton, Oregon. Tek’s sales in the fiscal year ending May 31, 2006 were about $1 billion. Its main products are scientific measuring instruments such as protocol analyses and simulators, network monitoring systems, transmission and cable test products, and a broad range of oscilloscopes. Part of the foreign sales were direct exports from Tek’s Beaverton manufacturing and research facility. A second part of sales were passed through Tek’s own foreign sales and assembly subsidiaries. A third part of sales were through joint ventures such as in Japan (Sony) and China. Tek also imported components and other materials that were used in the manufacturing operations in Beaverton. Tek’s main competitors are Agilent (formerly HP’s measuring instruments business) and Siemens (a very large German conglomerate).

Tek wishes to hedge a €4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment is due in three months. Tek’s Italian unit has obtained information about local currency borrowing and Citibank has offered Tek the other quotes:

Spot rate:		$1.2000/€
Three-month forward rate:		$1.2180/€
Three-month put option on euros at strike price of $1.0800/€:		3.40% premium
Tek’s weighted average cost of capital:		9.80% p.a.
90-day dollar investment (deposit) rate:	4.00% p.a.
90-day euro investment (deposit) rate:	4.40% p.a.
90-day dollar borrowing rate:	5.60% p.a.
90-day euro borrowing rate:	6.40% p.a.

Which alternative should Tek choose if it prefers to play it safe? Which alternative should Tek choose if it is willing to take a reasonable risk and has a directional view that the euro may be appreciating vs. the dollar during the next three months? Please use Excel to show the dollar revenue 3 months later. Please explain what TEK needs to do in each hedge and what the best decision is.

Answer 1