In: Finance
a) In hedging with forward contract, we will agree to sell SFr80 million in ticket sales receivable in 180 days in the forward contract today. The rate fixed will be $0.6578/SFr
The hedgd value in CAD = SFr80 million * $0.6578/SFr= CAD 52.624 million
b) In money market hedge, SFr will be borrowed today in such a way that after 6 months, the amount exactly equals SFr80 million. The borrowed amount will be converted today to CAD and invested in Canada.
Amount borrowed today = 80/(1+0.0401*180/365) = SFr78.44865 million
Amount converted to CAD today = SFr78.44865 million * $0.6433/SFr = $50.46602 million
This amount is invested at 7.98% for 180 days and final amount in $ receivable after 180 days = 50.46602*(1+0.0798*180/365) = $52.45203 million
Hedged value in this case is CAD 52.45203 million
c) The forward contract is better and preferable as the hedged value in Canadian Dollar is higher. Strategy used in a) is preferable
d) If the expected spot rate in 180 days is $0.67/SFr , the expected value of receivables in Canadian Dollar
= SFr80 million * $0.67/SFr= CAD 53.60 million
In this case, the hedging does not seem suitable. However, the expected exchange rate may not occur and hence it is still advisable to hedge at least some part of the exposure