Homework Assignment # 5 MELBOURNE Manufacturing: Hedging using Derivatives MELBOURNE Manufacturing Shiela Forbes is the Chief Financial Officer [CFO]…

Homework Assignment # 5 MELBOURNE Manufacturing: Hedging using Derivatives

MELBOURNE Manufacturing

Shiela Forbes is the Chief Financial Officer [CFO] of MELBOURNE Manufacturing, a U.S. based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm for Five million pounds. This single sale is quite large in relation to MELBOURNE’s present business. MELBOURNE has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in FEBRUARY with payment due six months later in AUGUST. Shiela Forbes has collected the following financial market information for the analysis of her currency exposure problem:

• Spot Exchange rate: $1.3640 per British pound.

• Six-month forward rate: $1.3549 per pound

• MELBOURNE’s cost of capital: 12%

• U.K. annual borrowing interest rate: 8.0% (or 4% interest for six months)

• U.K. annual investment interest rate: 7.0% (or 3.6% interest for six months)

• U.S. annual borrowing interest rate: 4.0% (or 2.0% interest for six months)

• U.S. one-year investment interest rate: 3.0% (or 1.5% interest for six months)

• August put option in the over-the-counter (bank) market for 1,000,000 British pounds;

Strike price $1.35 (nearly at-the money) 2.0% premium

• MELBOURNE’s advisory service forecast the spot rate in Six months will be $1.36 /pound.

Like many manufacturing firms, MELBOURNE operates on relatively narrow margins. Although Ms. Forbes and MELBOURNE would be very happy if the pound appreciated versus the dollars, concerns center on the possibility that the pound will fall. When Ms. Forbes budgeted this specific contract, she determined that the minimum acceptable margin was at a sale price of $6,500,000. The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at $1.30 per British pound. Any exchange rate below would result in MELBOURNE actually losing money on the transaction.

Four alternatives are available to MELBOURNE to manage the exposure:

A. Remain un-hedged.

B. Hedge in the forward market.

C. Hedge in the money market.

D. Hedge in the options market.

What should MELBOURNE do?

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more