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Vicky HAN
Rocío PARDO DE DONLEBÚN Y RUESTA
Diego BARRIOS CARBALLÉS
Emilio HERNÁNDEZ
Alexis REVUE
What is the current situation ?What can we do ?What should we do ?
2
Merrill Electronics Corporation (MEC) : Electrical and Electronics manufacturer ImporterImporter Japanese consumer electronics Personal Computer STFW and HDWR Distributor of Fuji Electronics
3Current Situation (1/3) – Merrill history
High volatilityvolatility of the Japanese Yen
Payment in 90 90 days days currency risk exposure
Most of the equipment imported from Japan (80%80%)
Japanese suppliers insisted on invoicing invoicing in Yen in Yen
4Current Situation (2/3) – Environment
9 month Loss due to Exchange Rate $ -309.700$ -309.700
ER Loss / Net Income : 36% Risk Exposure : ¥ Acc. Pay. +99%
5
$ -531.200 $ +221.500
Current Situation (3/3) – Impacts
6
A. Remain Unhedged
Lock-inLock-in methods
B. Forward C. Money Market D. Option
E. Future
The Problem – Exchange Rate Problem from IMPORTER’s perspective
CHARACTERISTICS Doing nothing
PROS You might savesave money
CONS Directly influenced by future spot rate You might loselose money… … You do not know until it happensYou do not know until it happens
7A - Unhedged (1/2)
8A - Unhedged (2/2) – Net Profit / Spot Rate
e¥/$,t = ¥126Saving = $20,064
e¥/$,t = ¥126Saving = $20,064
¥ APPRECIATION ¥ DEPRECIATION
e¥/$,t = ¥122Loss = $38,484
e¥/$,t = ¥122Loss = $38,484
CHARACTERISTICS Fixed Forward Rate
PROS No risk, fixed rate Easy to contract
CONS Can not benefit from market opportunities
9B - Forward (1/2)
10
fwd¥/$ = ¥124.95Saving = $5,058fwd¥/$ = ¥124.95Saving = $5,058
B - Forward (2/2) – Net Profit / Spot Rate
¥ APPRECIATION ¥ DEPRECIATION
CHARACTERISTICS Short-term borrowing, lending,
buying and selling Maturities of one year or less Instruments: T bills, commercial
paper, bankers' acceptances, CD, etc.
PROS Less risks Easy to get into the money
market
CONS Can be more expensive Necessary to get a loan
11C – Money Market (1/2)
cash$
bb
ii
e¥/$,0
d0 d90
loan$
fixed plan¥
12
b$ = 1.75% = 6%/4 + 0.25%i¥ = 0.8438% = 3.375% /4
Loss = $16,228
b$ = 1.75% = 6%/4 + 0.25%i¥ = 0.8438% = 3.375% /4
Loss = $16,228
¥ APPRECIATION ¥ DEPRECIATION
C – Money Market (2/2) – Net Profit / Spot Rate
CHARACTERISTICS Two parties, strike price, maturity date Call option
Buyer : rightright Seller : obligation obligation when seller strikes
The buyer pays a premium premium for this right.
PROS The buyer can choose choose Can be combined with other instruments The contract is not locked Unlimited profits Unlimited profits Limited loss Limited loss (premium)
CONS Cost of the premium
13D – Option (1/2)
14
Call Rate = ¥125Premium = $0.00017
Loss = $32,472
Call Rate = ¥125Premium = $0.00017
Loss = $32,472
¥ APPRECIATION ¥ DEPRECIATION
D – Option (2/2) - Net Profit / Spot Rate
15E - Future (1/2)
CHARACTERISTICS Standardized contracts Maturity date Exchange rate Contract size Premium
PROS Fixed E/R when matures Low risk of losing money Possibility to sell it at market price
CONS Broker’s commission Expensive premium Requires attention due to the
speculation involved Cash available at fixed maturity date
16
Future Size = ¥12.5Bftr¥/$ = ¥124.29
Premium = $1,500Loss = $31,572
Future Size = ¥12.5Bftr¥/$ = ¥124.29
Premium = $1,500Loss = $31,572¥ APPRECIATION ¥ D
E - Future (2/2) – Net Profit / Spot Rate
17
18Recommendation 1/4 – What and when it’s cheaper ?
¥ APPRECIATION ¥ DEPRECIATION
19Recommendation 2/4 - Exchange Rate History
Appreciation ?Depreciation ?
??
Factors Affecting E/R
Relative Interest RatesRelative Inflation Rates
PPP Big Mac indexUS$ undervalued by 24% against the ¥
Long Term Depreciation of ¥ against $
Relative Income LevelsGovernment Controls
Japan is likely to stimulate domestic demand
Expectations Strong ¥ would solve Japanese trade surplus Weaker $ would boost US competitiveness
Appreciation of ¥ against $
20Recommendation 3/4 - What is the exchange rate trend ?
Trend of Exchange Rate:
Appreciation of ¥ against $e¥/$ < ¥ 124.60
Recommendation:
FORWARD Benefits:
No risk at all Saving between $5,058 & $7,217 Easy to manage
For all the transactions:Apply the same comparison methodConsider the money market
21Recommendation 4/4 - What do we recommend ?
22
Vicky HAN
Rocío PARDO DE DONLEBÚN Y RUESTA
Diego BARRIOS CARBALLÉS
Emilio HERNÁNDEZ
Alexis REVUE