Treasury and Risk Management: Analysis of Currency Hedging for ABC

This report analyzes various hedging strategies for ABC company, including unhedged, forward hedge, money market hedge, and option hedge strategies. It evaluates the potential profit and loss associated with each strategy under different future spot rate scenarios. The analysis indicates that the money market hedge strategy offers the highest potential profit for ABC company in managing currency risk. The report concludes that ABC should consider implementing a money market hedge to mitigate risks associated with currency conversion after one year. Desklib provides solved assignments and past papers for students.

Running head: TREASURY AND RISK MANAGEMENT
Treasury and Risk Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
a.1) ABC unhedged strategy:.....................................................................................................2
a.2) ABC Forward hedge strategy:.............................................................................................2
a.3) ABC Money Market hedge strategy:..................................................................................3
a.4) ABC Option hedge strategy:...............................................................................................4
b) Optimal hedge for ABC:........................................................................................................5
Reference and Bibliography:......................................................................................................7

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a.1) ABC unhedged strategy:
Strategy (Un-Hedge) Value Value Profit/loss Comment
Payment in 1 year €
50,000,000
Spot rate $
1.100
$
55,000,000.0
Future Spot rate $
0.800
$
40,000,000.0
$
(15,000,000.0)
Hedge is Unsuccessful
Future Spot rate $
0.900
$
45,000,000.0
$
(10,000,000.0)
Hedge is Unsuccessful
Future Spot rate $
1.050
$
52,500,000.0
$
(2,500,000.0)
Hedge is Unsuccessful
Future Spot rate $
1.130
$
56,500,000.0
$
1,500,000.0
Hedge is Successful
Future Spot rate $
1.200
$
60,000,000.0
$
5,000,000.0
Hedge is Successful
Future Spot rate $
1.250
$
62,500,000.0
$
7,500,000.0
Hedge is Successful
Future Spot rate $
1.300
$
65,000,000.0
$
10,000,000.0
Hedge is Successful
a.2) ABC Forward hedge strategy:
Strategy (Forward Value Value Profit/loss Comment

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hedge)
Payment in 1 year € 50,000,000.0
Forward rate $ 1.130 $ 56,500,000.0
Future Spot rate $ 0.800 $ 40,000,000.0 $ 16,500,000.0 Hedge is Successful
Future Spot rate $ 0.900 $ 45,000,000.0 $ 11,500,000.0 Hedge is Successful
Future Spot rate $ 1.050 $ 52,500,000.0 $ 4,000,000.0 Hedge is Successful
Future Spot rate $ 1.130 $ 56,500,000.0 $ - Hedge is Successful
Future Spot rate $ 1.200 $ 60,000,000.0 Hedge is
Unsuccessful
Future Spot rate $ 1.250 $ 62,500,000.0 Hedge is
Unsuccessful
Future Spot rate $ 1.300 $ 65,000,000.0 Hedge is
Unsuccessful
a.3) ABC Money Market hedge strategy:
Strategy (Money
market hedge)
Value Value Profit/loss Comment
Payment in 1 year € 50,000,000.0
Interest in Euro 2.000% € 980,392.2
Amount in euros
borrowed
€ 49,019,607.8
Spot rate $ 1.100 $ 53,921,568.6
interest in US 5.500% $ 2,965,686.3
Total payment $ 56,887,254.9

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received in 1 yr
Future Spot rate $ 0.800 $ 40,000,000.0 $ 16,887,254.9 Hedge is Successful
Future Spot rate $ 0.900 $ 45,000,000.0 $ 11,887,254.9 Hedge is Successful
Future Spot rate $ 1.050 $ 52,500,000.0 $ 4,387,254.9 Hedge is Successful
Future Spot rate $ 1.130 $ 56,500,000.0 $ 387,254.9 Hedge is Successful
Future Spot rate $ 1.200 $ 60,000,000.0 Hedge is Unsuccessful
Future Spot rate $ 1.250 $ 62,500,000.0 Hedge is Unsuccessful
Future Spot rate $ 1.300 $ 65,000,000.0 Hedge is Unsuccessful
a.4) ABC Option hedge strategy:
Strategy (Option
Hedge Put Option)
Value Value Profit/loss Comment
Payment in 1 year € 50,000,000.0
Put option 1.110
Exercise price 0.060
Total value of put option 1.050 $ 52,500,000.0
Future Spot rate $ 0.800 $ 40,000,000.0 $ 12,500,000.0 exercise
Future Spot rate $ 0.900 $ 45,000,000.0 $ 7,500,000.0 exercise
Future Spot rate $ 1.050 $ 52,500,000.0 $ - exercise
Future Spot rate $ 1.130 $ 56,500,000.0 $ (4,000,000.0) Do not exercise
Future Spot rate $ 1.200 $ 60,000,000.0 $ (7,500,000.0) Do not exercise
Future Spot rate $ 1.250 $ 62,500,000.0 $ (10,000,000.0) Do not exercise
Future Spot rate $ 1.300 $ 65,000,000.0 $ (12,500,000.0) Do not exercise

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Strategy (Option
Hedge Call Option)
Value Value Profit/loss Comment
Payment in 1 year € 50,000,000.0
Cal option 1.150
Exercise price 0.080
Total value of put option 1.070 $ 53,500,000.0
Future Spot rate $ 0.800 $ 40,000,000.0 $ (13,500,000.0) Do not exercise
Future Spot rate $ 0.900 $ 45,000,000.0 $ (8,500,000.0) Do not exercise
Future Spot rate $ 1.050 $ 52,500,000.0 $ (1,000,000.0) Do not exercise
Future Spot rate $ 1.130 $ 56,500,000.0 $ 3,000,000.0 exercise
Future Spot rate $ 1.200 $ 60,000,000.0 $ 6,500,000.0 exercise
Future Spot rate $ 1.250 $ 62,500,000.0 $ 9,000,000.0 exercise
Future Spot rate $ 1.300 $ 65,000,000.0 $ 11,500,000.0 exercise
b) Optimal hedge for ABC:
Hedging Strategies Potential profit range Potential profit range
Strategy (Un-Hedge) $ 10,000,000.00 $ (15,000,000.00)
Strategy (Forward hedge) $ 16,500,000.00 $ -
Strategy (Money market hedge) $ 16,887,254.90 $ 387,254.90
Strategy (Option Hedge Put Option) $ 12,500,000.00 $ -
Strategy (Option Hedge Call Option) $ 11,500,000.00 $ 3,000,000.00
The above table depicts the optimal hedge strategy that could be used by ABC
company for hedging the exposure in the currency market. Moreover, money market hedge is

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putting the viable approach of providing the highest potential profits that could be generated
from currency Hedge. The other methods of hedging do not provide adequate profits from the
currency conversion (Balcılar et al. 2016). Therefore, ABC company can use money market
hedge to reduce the relevant risk from currency conversion after one year.

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Reference and Bibliography:
Bakke, T.E., Mahmudi, H., Fernando, C.S. and Salas, J.M., 2016. The causal effect of option
pay on corporate risk management. Journal of Financial Economics, 120(3), pp.623-643.
Balcılar, M., Demirer, R., Hammoudeh, S. and Nguyen, D.K., 2016. Risk spillovers across
the energy and carbon markets and hedging strategies for carbon risk. Energy Economics, 54,
pp.159-172.
Brooks, R., 2015. Financial management: core concepts. Pearson.
DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank
capital structure: Why high leverage is optimal for banks. Journal of Financial
Economics, 116(2), pp.219-236.
Hopkin, P., 2017. Fundamentals of risk management: understanding, evaluating and
implementing effective risk management. Kogan Page Publishers.
Jiménez, M.A., Gaxiola, A., Armesto, J.J., González-Browne, C., Meserve, P.L., Kelt, D.A.,
Gutiérrez, J.R. and Jaksic, F.M., 2016. Bet-hedging strategies of native and exotic annuals
promote coexistence in semiarid Chile. Journal of Arid Environments, 126, pp.62-67.
Martinez-Garcia, R. and Tarnita, C.E., 2017. Seasonality can induce coexistence of multiple
bet-hedging strategies in Dictyostelium discoideum via storage effect. Journal of theoretical
biology, 426, pp.104-116.
Mensi, W., Hammoudeh, S. and Yoon, S.M., 2015. Structural breaks, dynamic correlations,
asymmetric volatility transmission, and hedging strategies for petroleum prices and USD
exchange rate. Energy Economics, 48, pp.46-60.