International Finance Assignment: Hedging and Risk Management Analysis

This assignment solution covers key concepts in international finance, focusing on derivatives and hedging strategies. It addresses true/false and multiple-choice questions related to options, futures, and financial engineering. The solution also discusses the Foreign Corrupt Practices Act, ethical and labor issues in international operations, and the role of LIBOR. Practical computations are included to compare the dollar cost of option hedging and money market hedging, concluding with a recommendation for option-based hedging. The document provides a comprehensive overview of risk management and ethical considerations in international finance, offering valuable insights for students. Desklib provides a platform to access this and other solved assignments for academic support.

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Question 1
1) This is true as the loss would be potentially higher owing to high premium. However ,
the upside would also be significantly higher.
2) This is false since time value loss would be higher if the time period is higher and not
lower.
3) This is false since hedging can also be achieved through other means besides financial
derivatives instruments. This is true by borrowing money in foreign currency or
investing money as the requisite case may be.
Question 2
1) Answer is B since the concern of the truck driver is to transport the corn and hence
the underlying value would not be important.
2) Answer is A since no financial engineering is involved with regards to mortgage
whereby a physical asset is already present in the form of house.
3) Answer is C since the given action tends to lead to reduction in the transaction costs.
Question 3
1) Foreign Corrupt Practices Act is a Federal Act enacted by the US government in 1977
with the objective of addressing the twin problems of bribing foreign officials along
with lack of transparency in accounting. The enactment of this act has led to greater
transparency in international transactions involving US businesses and ensured that
bribing of foreign officials is not carried out and thereby enhanced better corporate
governance in international operations (Parrino and Kidwell, 2014).
2) The various ethical and labour issues are highlighted below.
 Use of child labour is rampant which is harmful for the children as it adversely
impacts their studies.
 The wages paid to the workers is exceptionally low since the operations are
typically based in countries where the labour laws are quite lax.

 There are significant safety and health risks in a bid to lower the cost of
manufacturing and also underlying legislation in this regard lacks strict
enforcement.
 There is also the problem of environment degradation coupled with labour
exploitation.
3) LIBOR or London Inter-Bank Offer Rate serves as a benchmark rate for determining
the interest rate on the short term loans that banks extend to each other. However, this
is also used for determination of interest rate for the loan extended to other borrowers
with suitable adjustments made to the LIBOR based on the associated risk with the
borrower (Damodaran, 2015).
Question 4
1) The requisite computations are carried out in excel and the relevant screenshot is indicated
below (Brealey, Myers and Allen, 2014).
2) The requisite computations are indicated below.

3) Based on the basis of the above computations the following can be concluded.
Dollar cost of option hedging (maximum) = $ 4,125,000
Dollar cost of money market hedging (independent of the spot rate in the future) = $
4,545,455
Based on the above, it is apparent that the superior strategy is option based hedging and thus
no future spot rate would exist when there would be indifference between the two hedging
techniques (Damodaran, 2015).

References
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New
York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications