Chapter 11: Real Cost of Hedging Payables or Receivables

This template helps students in calculating real cost of hedging the payables (or receivables)
based on the existing forward rate and realized spot rate.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as information in the input screen is changed.

Input Screen
Currency of foreign country GBP
Type of hedging (payable or receivable) receivable
Number of foreign currency units for hedging (units) 10000
Various quoted forward rates (dollar/foreign currency)-FR 1.50 1.55 1.60 1.65
Realized spot rate (dollar/foreign currency)-RSR 1.40

Output Screen
Real Cost of Hedging Receivables[RCHR]= units*(RSR-FR) ($1,000) ($1,500) ($2,000) ($2,500)

Conclusion:
Thus, the lower is the forward rate quoted at the time the hedge is enacted, the larger the number of dollars
needed to hedge a given amount of receivables.
 1.70 1.75

($3,000) ($3,500)

number of dollars
Chapter 11: Money Market Hedge of Payables [similar to: (a) Steps 1 through 4 on page 315; and (b) problem 16 on page 333

This template helps students in understanding the importance of money market hedge.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as the information in the input screen is changed.
This template can be used for 365 (or 360) days in a year.

In order to see the impact of changing interest rates in either country on a money market hedge,
please change the interest rate in item 3a or item 4a (one at a time).

Input Screen
1. Currency of foreign country Malaysian ringgit
2. Amount of foreign currency needed 300,000
3. Annual interest rate in foreign country (enter .03 for 3 percent) 12.00% 14.00%
4. Annual interest rate in home country (enter .03 for 3 percent) 16.00% 16.00%
3a. Interest rate change in the foreign country (either b17 or b18 must be zero) 2.00%
4a. Interest rate change in the home country (either b17 or b18 must be zero) 0.00% either item 3a or item 4a must b
5. Time period (in days) for hedging 90
6. Number of days in a year 360
7. Forward rate (FR) of currency (dollar/foreign currency) 0.4000
8. Spot rate (SR) of currency (dollar/foreign currency) 0.4040

Conclusion:
The higher is interest rate in foreign country, the less expensive is the money market hedge on payables

Output Screen
Step 1: Borrow amount of home currency 117,669.90 117,101.45
Step 2: Convert borrowed amount to foreign currency@spot rate 291,262.14 289,855.07
Step 3: For amount in step 2, purchase a security@foreign interest rate 300,000.00 300,000.00
Step 4: Pay back the loan in home currency plus interest 122,376.70 121,785.51
nd (b) problem 16 on page 333]

16.00% 18.00%
16.00% 16.00%

either item 3a or item 4a must be zero

dge on payables

116,538.46 115,980.86
288,461.54 287,081.34
300,000.00 300,000.00
121,200.00 120,620.10
Chapter 11: Money Market Hedge of Receivables [similar to information on pages 315 and 316; and (b) problem 17 on page 3

This template helps students in understanding the importance of money market hedge.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as the information in the input screen is changed.
This template can be used for 365 (or 360) days in a year.

In order to see the impact of changing interest rates in either country on a money market hedge,
please change the interest rate in item 3a or item 4a (one at a time).

Input Screen
1. Currency of foreign country British Pounds
2. Amount of foreign currency needed 400,000
3. Annual interest rate in foreign country (enter .03 for 3 percent) 18.00% 18.00%
4. Annual interest rate in home country (enter .03 for 3 percent) 16.00% 18.00%
3a. Interest rate change in the foreign country (either item 3a or item 4a must be 0.00% either item 3a or item 4a must b
4a. Interest rate change in the home country (either b17 or b18 must be zero) 2.00%
5. time period (in days) for hedging 180
6. Number of days in a year 360
7. Forward rate (FR) of currency (dollar/foreign currency) 1.5000
8. Spot rate (SR) of currency (dollar/foreign currency) 1.4800

Conclusion:
The higher is interest rate in home country, the more revenue to be received when using money market hedge

Output Screen
Step 1: Borrow amount of foreign currency 366,972 366,972
Step 2: Convert borrowed amount to home @spot rate 543,119 543,119
Step 3: For amount in step 2, purchase a home security@home interest rate 586,569 592,000
Step 4: Pay back the loan in foreign currency plus interest 400,000 400,000
 and (b) problem 17 on page 334]

18.00% 18.00%
20.00% 22.00%
either item 3a or item 4a must be zero

money market hedge

366,972 366,972
543,119 543,119
597,431 602,862
400,000 400,000
Chapter 11: Use of Call Options for Hedging Payables [similar to: (a) Exhibit 11.4 on page 317; and (b) problem 18 on page 33

This template helps students in understanding the importance of call option on hedging the payables.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as the information in the input screen is changed.

In order to see the impact of call option premium on hedging the payables,
please enter a number in item 4a

Input Screen
1. Currency of foreign country British Pounds Conclusion:
2. Payables in foreign currenc 100,000 The cost of hedging payables increases
3. Call option's exercise price $1.60 with the size of the option premium
4. Call option premium $0.04
4a. change in call premium $0.02
5. Possible spot rate values $1.58 $1.62 $1.66

Output Screen call premium= $0.04 call premium= $0.06

total amount paid with option

total amount paid with option

premium plus exercise/unit

premium plus exercise/unit

Spot rate at expiration

if option is used/unit

call premium/unit

call premium/unit

Scenario
1 $1.58 $1.58 $0.04 $1.62 $162,000 $0.06 $1.64 $164,000
2 $1.62 $1.60 $0.04 $1.64 $164,000 $0.06 $1.66 $166,000
3 $1.66 $1.60 $0.04 $1.64 $164,000 $0.06 $1.66 $166,000
; and (b) problem 18 on page 334]

call premium= $0.08

total amount paid with option
premium plus exercise/unit
call premium/unit

$0.08 $1.66 $166,000

$0.08 $1.68 $168,000
$0.08 $1.68 $168,000
Chapter 11: Use of Put Options for Hedging Receivables [Four steps of hedging receivables from the text booksimilar to: (a) E

This template helps students in understanding the importance of put options on hedging the receivables.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as the information in the input screen is changed.

In order to see the impact of put option premium on hedging the receivables,
please enter a number in item 4a

Input Screen
1. Currency of foreign country NZ $ Conclusion:
2. Receivables in foreign curr 600,000 The revenue received when hedging receivables is
3. Put option's exercise price $0.50 inversely related to the size of the option premium
4. Put option premium $0.03
4a. change in put premium $0.01
5. Possible spot rate values $0.44 $0.46 $0.51

Output Screen put premium= $0.03 put premium= $0.04 put premium=

total amount received with option

total amount received with option

exercise minus premium/unit

exercise minus premium/unit

Spot rate at expiration

if option is used/unit

put premium/unit

put premium/unit

put premium/unit
Scenario
1 $0.44 $0.50 $0.03 $0.47 $282,000 $0.04 $0.46 $276,000 $0.05
2 $0.46 $0.50 $0.03 $0.47 $282,000 $0.04 $0.46 $276,000 $0.05
3 $0.51 $0.51 $0.03 $0.48 $288,000 $0.04 $0.47 $282,000 $0.05
 the text booksimilar to: (a) Exhibit 11.5 on page 318; and (b) problem 19 on page 334]

g receivables is
option premium

put premium= $0.05

total amount received with option
exercise minus premium/unit

$0.45 $270,000
$0.45 $270,000
$0.46 $276,000