You are now the not-so-new CFO of Agri-Drone. It’s been over a year since you introduced the Company to the idea of managing risks it confronts in doing business overseas. The market buzz about the Company’s innovation has continued. The first foreign customer, the French farming cooperative, has made additional purchases, and word is spreading about the Company’s family of unique products.
As your first foray into the realm of international sales gathers steam, you recommend and implement an immediate hedge of the entire $1.1 million sale to the French Co-op by using a six month forward contract.
You’ve been using that approach ever since.
As it turns out, the EUR/USD strengthens during the six months of that first forward contract, and it sits at 1.40 at the time Agri-Drone receives its payment in euros. Jim, the VP of Sales, isn’t the only person to comment that Agri-Drone would have been better off in hindsight without your forward contract in place.
You just shake your head.
The good news is that most members of the Company’s leadership team ‘get it.’ Your initiative in protecting the Company has been recognized, and with the endorsement of Stephanie Majors, the CEO, you have educated the leadership team about the Company’s foreign currency risks and what it should be doing about them. With the exception of Jim, who continues to chide you when (and only when) currency fluctuations go in Agri-Drone’s favor, everybody seems pretty happy.
There is one person who is truly not satisfied, however, and that’s you.
“This is getting expensive!”
What has caused your frustration is your need to constantly commit Agri-Drone’s borrowing capacity to support what seems to be an ever-growing series of forward contracts that are, just now, starting to involve multiple currencies. Your bank, behaving like banks do, insists on a progressively growing letter of credit to back the forward contracts. Under your loan agreement, letters of credit get subtracted from your credit line, so your borrowing capacity gets reduced.
You, of course, can contemplate better uses for the credit line in support of the Company’s rapid growth. Certainly, it could be used for expanded working capital needs, but you’re also starting to hear whispers of plant expansion ideas. Some of these certainly could be outside of the U.S.
You know that sooner or later a more cost efficient way of handling Agri-Drone’s currency risk issues will be needed as the types of risk evolve.
So, you begin to explore other ways to contain currency risk. Sure, you know about options, but you think their cost would be a hard sell internally. You can almost hear Jim saying: “What? Two or three percent right off the top on every international deal?” While you hate to admit it, on this one you and Jim agree.
And so today you are wondering about two things:
Is there a more cost-effective way to eliminate foreign currency risk?
Is there truly a need to eliminate all foreign currency risk?
Continue next page.
“Why didn’t I think of that sooner!”
This afternoon, as you struggle with your dilemma, you walk into the office kitchen to make a cup of coffee. As you’re waiting for the K-cup to brew, you see some panelists fast-talking on CNBC TV about risk bracketing and risk arbitrage on investments in volatile stocks. One of them shouts, “It’s almost free!” Not catching the full drift, you grab your coffee and walk back to your office.
And then it hits you. He was talking about option premiums being ‘almost free,’ which, of course, you know isn’t the case. Option premiums always seem to be priced at a few percent of the underlying security value, which is far from ‘almost free.’ That can only mean he was talking about offsetting option premiums.
And you sit up and gasp as a revelation hits you.
How could option premiums be offsetting? Explain in a narrative way.
Note: The space expands as you write.
“Now we’re getting somewhere!”
You figure out how offsetting option premiums can be achieved, and now you turn your attention to how to use them at Agri-Drone. Your objective is the same: protect the Company against its foreign currency risks on major sales to foreign customers. However, with the increased volume of activity, you seek to explore ways to eliminate something less than 100 percent of the risk and you broach that idea to Stephanie Majors, the CEO. She encourages you to continue your research. And so, as is your nature, you start playing with some numbers.
Assume the following facts:
Current EUR/USD spot rate –
6 mo. forward contract pricing
6 mo. EUR/USD Call strike 1.3000 premium 3%
6 mo. EUR/USD Call strike 1.3200 premium 2%
6 mo. EUR/USD Put strike 1.3000 premium 4%
6 mo. EUR/USD Put strike 1.2800 premium 2%
What pairing of options would come closest to achieving the same risk management attributes of a EUR/USD six month forward contract? Why?
Note: The space expands as you write.
“Finally, I may have a better answer!”
Your deepening understanding of option strategies has CEO Majors quite impressed. She’s asked for a simple demonstration, which you prepare and deliver.
Assuming only the fact-set presented, what strategy would you suggest to limit most of the currency risk on a substantial sale to a European customer, while at the same time minimizing transaction costs to the Company?
Assume the sale price is set at $1,000,000 and the contract specified payment of 769,231 Euros in six months upon delivery. Using your suggested strategy, prepare a calculation of the ultimate dollar revenues received, net of option costs, assuming the six month EUR/USD actually ends up being 1.25, 1.30 and 1.35. Also, present a side calculation of what would occur if no mitigation strategy was used.
Why Choose Us
At Myhomeworkwriters.com, we always aim at 100% customer satisfaction. As such, we never compromise o the quality of our homework services. Our homework helpers ensure that they craft each paper carefully to match the requirements of the instruction form.
Professional Academic Writers
With Myhomeworkwriters.com, every student is guaranteed high-quality, professionally written papers. We ensure that we hire individuals with high academic qualifications who can maintain our quality policy. These writers undergo further training to sharpen their writing skills, making them more competent in writing academic papers.
Our company maintains a fair pricing system for all academic writing services to ensure affordability. Our pricing system generates quotations based on the properties of individual papers.
My Homework Writers guarantees all students of swift delivery of papers. We understand that time is an essential factor in the academic world. Therefore, we ensure that we deliver the paper on or before the agreed date to give students ample time for reviewing.
Myhomeworkwriters.com maintains a zero-plagiarism policy in all papers. As such, My Homework Writers professional academic writers ensure that they use the students’ instructions to deliver plagiarism-free papers. We are very keen on avoiding any chance of similarities with previous papers.
Customer Support 24/7
Our customer support works around the clock to provide students with assistance or guidance at any time of the day. Students can always communicate with us through our live chat system or our email and receive instant responses. Feel free to contact us via the Chat window or support email: email@example.com.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Our Homework Writing Services
My Homework Writers holds a reputation for being a platform that provides high-quality homework writing services. All you need to do is provide us with all the necessary requirements of the paper and wait for quality results.
At My Homework Writers, we have highly qualified academic gurus who will offer great assistance towards completing your essays. Our homework writing service providers are well-versed with all the aspects of developing high-quality and relevant essays.
Admission and Business Papers
With Myhomeworkwriters.com, we will help you secure a position at your desired institution. Our essay writing services include the crafting of admissions papers. We will still help you climb your career ladder by helping you write the official papers that will help you secure a job. We will guide you on how to write an outstanding portfolio or resume.
Editing and Proofreading
Myhomeworkwriters.com has a professional editorial team that will help you organize your paper, paraphrase it, and eliminate any possible mistakes. Also, we will help you check on plagiarism to ensure that your final paper posses quality and originality.
My Homework Writers harbors professional academic writers from diverse academic disciplines. As such, we can develop homework writing services in all academic areas. The simplicity or complexity of the paper does not affect the quality of homework writing services.