Risk Management

Running head: RISK MANAGEMENT
Risk Management
Name of the Student:
Name of the University:
Authors Note:

RISK MANAGEMENT
1
Table of Contents
1.i) Calculating the over the counter forward rates for each payment:......................................2
2) Showing how currency future hedges can affect the exchange rate uncertainty:..................3
3) Assessing the efficiency of the future contract hedges:.........................................................4
4) Showing how an arbitrageur could profit:.............................................................................5
5) Discussing the relevant merits for Mahoney of the over the counter and exchange traded
methods:.....................................................................................................................................5
1) Calculating the price for zero coupon bond listed:................................................................5
2) Specifying the swaps rates assuming the counterparty bank deals:.......................................6
3) Comparing the swap rates with the current variable rate:.....................................................6
Therefore, 0.56% will be benefited by using the fixed cost in comparison to the variable cost.
Therefore, entering the swap trade would benefit the organisation, as its overall debt
payments would be reduced due to the low level of interest rates.............................................7
4) Explaining the interest rate risk can hedge and discuss factors like to influence the decision
to hedge or not:...........................................................................................................................7
5) Stating how the bank can protect its return by entering into the forward rate agreements:. .8
References:...............................................................................................................................10

RISK MANAGEMENT
2
Task 1: Exchange Rate Risk Management:
1.i) Calculating the over the counter forward rates for each payment:
Mahoney chemicals plc has high risk from the currency market, as the organisation is
set to receive payments in future. Moreover, the payments would be in dollars, which needs
to be converted in pounds, as it is the home currency of the company. Therefore, adequate
hedge can be conducted for reducing the negative impact on the currency exposure of
Mahoney. Hence, the following hedges are conducted for future payments that would be
received by Mahoney.
Payment in future
 $1.2 million on 27th March 2019
Buying $1.2 million using the present value method
¿ 1,200,000
¿¿
Buying the sterling 1,197,782.77 at (1/1.3321=0.75069)
= 1,197,782.77 x 0.75069
= 899,168.81
Opportunity cost = 899,168.81 x (1+ 0.83 %
365/28 )
= 899,741.32
One-month forward rate = £ 877,741.32
$ 1,200,000 =$ 0.749784434
 $2.3 million on 26th April 2019
Buying $2.3 million using the present value method