Question

In: Finance

Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas)...

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, €30 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. The company’s foreign exchange advisors believe the euro will be at about $1.4200/€ in 90 days. What are the various hedging options available to Mattel.

Assumptions

Values

90-day A/R (€)

€ 30,000,000.00

Current spot rate ($/€)

$1.4158

Credit Suisse 90-day forward rate ($/€)

$1.4172

Barclays 90-day forward rate ($/€)

$1.4195

Expected spot rate in 90 days ($/€)

$1.4200

90-day eurodollar interest rate

4.000%

90-day euro interest rate

3.885%

     Implied 90-day forward rate (calculated, $/€)

$1.4162

90-day eurodollar borrowing rate

5.000%

90-day euro borrowing rate

5.000%

3-month call option on Euro at 1.25% Premium ($/€)

                            $1.4230

Homework 5

3-month put option on Euro at 1.25% Premium ($/€)                                                                                     $1.4220

Solutions

Expert Solution

Settling the 90days A/R at Market rate i.e. remain unhedge -

Spot rate in 90 days are same a current spot rate = €3,00,00,000 * $ 1.4158 = $42,474,000

Spot rate in 90 days are same a Barclays forward rate = €3,00,00,000 * $ 1.4195 = $42,585,000

Spot rate in 90 days are same a credit suisee forward rate= €3,00,00,000 * $ 1.4172 = $42,516,000

Spot rate in 90 days are expected spot rate= €3,00,00,000 * $ 1.4200 = $42,600,000

Sell Euro forward 90 days -

Amount Recieved at credit suisee forward rate = $42,516,000.

Amount Recieved at Barclays forward rate = $42,585,000.

Money Market Hedge -

First we need to calculate how much euro borrows against 90 days A/R =

€30,000,000 =

Borrowed amount against 90day A/R = €29,629,629.630

$ current value = €29,629,629.63 * $1.4158 = $41,949,629.630

WACC carry forward factor for 90 days = 1 + 1.25%

= 1.01125.

Future Value of Money Market hedge = $41,949,629.630 * 1.01125 = $42,421,562.96.

we does not enter in forward contract because amount is greater in expected rate.

If you have any query related to answer then feel free to ask in comments. Thanks

jeff jeffy answered 1 year ago
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