currency. The situations include • Purchasing or selling on credit goods or services when prices are stated in foreign currencies • Borrowing or lending funds when repayment is to be made in a foreign currency • Being a party to an unperformed forward contract • Acquiring assets or incurring liabilities denominated in foreign currencies [pic] Example (purchasing or selling): Leo Srivastava is the director of finance for Pixel Manufacturing‚ a U.S.-based manufacturer of hand-held computer
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Case Study #1 Metallgesellschaft AG Metallgesellschaft Refining and Marketing (MGRM)‚ was a subsidiary of Metallgesellschaft AG in Germany. In the early 90’s‚ MGRM chose to being selling long term (5 and 10 year) fixed price contracts for gasoline‚ heating oil‚ and diesel fuel. These contracts were successfully marketed with MGRM contracted for 160 million barrels of oil as of Nov 1993. Due to the fact that the MGRM entered into long term commitments for fuel delivery with fixed pricing‚ this
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Hedging Strategies using Futures Introduction to Hedging Hedging refers to reducing risk. Let us take a simple example to understand hedging. A farmer expects to produce ‘X’ quantity of a commodity by the end of the cropping season say‚ October. He has to invest a certain amount of money today from his savings or maybe take a loan in expectation of returns he will get in October. But‚ he cannot accurately predict the prices he will get for his produce. A dip in prices could result in a loss. To deal
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ECONOMICS A Short History of Derivative Security Markets By Ernst Juerg Weber The University of Western Australia DISCUSSION PAPER 08.10 A Short History of Derivative Security Markets Ernst Juerg Weber Business School University of Western Australia Crawley WA 6009 Australia eweber@biz.uwa.edu.au August 2008 Abstract Contracts for future delivery of commodities spread from Mesopotamia to Hellenistic Egypt and the Roman world. After the collapse of the Roman Empire‚ contracts
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1. Framework A. Identification of the risk Financial Risk There are three kinds of financial risk: market risk‚ liquidity risk and credit risk. Market Risk Price Risk The risk of a decline in the value of a security or a portfolio. Interest Rate Risk The risk that the value of an investment will change due to a change in the absolute level of interest rates. Example Dexia had a great interest rate risk. They had a lot of mortgage loans (long term). They financed the long term liabilities
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goals and objectives against which performance can be measured and there are a number of tools/concepts that can assist Managers in monitoring and measuring organizational performance. Some of these concepts include feed forward‚ concurrent and feedback control. Feed forward control is the most desirable type of control. This concept anticipates problems and provides the Manager with the opportunity to prevent problems before they take place. For example‚ in the budgeting process specific targets
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Suppose that the current Bid-Offer on the Euro is $1.21/E and $1.23/E‚ and the three-month forward is $1.185/E. 1. If you wish to hedge 100‚000 Euro Revenue due in three months‚ what position would you take? Explain why. a. Buy Euro forward at $1.23/E b. Buy dollars forward at $1.23/E c. Sell Euro forward at $1.185/E d. Sell dollars forward at $1.21/E e. Buy Euro forward at $1.185/E 2. If the Bid-Offer at maturity is $1.17/E and $1.19/E (assume the bank is following the same quote convention)
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Exercise international finance 1. The current spot exchange rate is €1‚40/£ and the three-month forward rate is €1‚35/£. Based on your analysis of the exchange rate‚ you are pretty confident that the spot exchange rate will be €1‚37/£ in three months. Assume that you would like to buy or sell £1.000.000. a. What actions do you need to take to speculate in the forward market? What is the expected euro profit from speculation? b. What would be your speculative profit in euro terms if in
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of their deal with Nova‚ Baker could have hedged in the forward market or hedge in the money market. In order to hedge in the forward market‚ Baker would have to strike a deal with the bank where the bank would provide Baker with a guaranteed exchange rate for the future exchange of currencies (forward rate). These contracts specified a date‚ an amount to be exchanged‚ and a rate. Any bank fee would be built into the rate. By securing a forward rate for the date of a foreign-currency-denominated cash
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magnetite investment project with total value of about 42 billion U.S. dollars. It is a normal course of business involved in large amount of money. The risk of exchange rate is obvious in such a long period and it’s common to enter into foreign exchange forward contracts. However‚ CITIC Pacific has chosen Accumulator contract with Australian dollar as target. That is to say‚ CITIC Pacific has the right to purchase Australian dollar with a discount when it’s appreciating but there is an upper limit; if Australian
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