Implementing Hedging Strategies in Foreign Exchange: Maximizing USD Value
Q 7: In scenario A (exchange rate will be 0.7975 USD per AUD) and strategy (c) (option hedge), what are your USD proceeds?
What factors need to be considered when calculating USD proceeds in scenario A with an option hedge strategy?
Q 8: In scenario B (exchange rate will be 0.6525 USD per AUD) and strategy (c) (option hedge), what are your USD proceeds?
How does the depreciation of the AUD in scenario B impact the USD proceeds with an option hedge strategy?
Answer:
To calculate the USD proceeds in scenario A using an option hedge strategy, we need to consider the exchange rate and the premium of the call option.
In scenario B, the exchange rate is expected to be 0.6525 USD per AUD, resulting in a depreciation of the AUD.
Explanation:
To calculate the USD proceeds in scenario A with an option hedge strategy, we must consider the exchange rate and the premium of the call option. With a projected exchange rate of 0.7975 USD per AUD, there is a 10% appreciation of the AUD.
Given the spot rate of 0.725 USD per AUD and a 90-day forward rate of 0.721 USD per AUD, we can anticipate an AUD appreciation. To protect against this, we can purchase put options with an exercise price of 0.727 USD per AUD and a premium of $0.035 USD per AUD.
Calculating the USD proceeds involves converting the 2M AUD to USD using the spot rate, then deducting the premium of the put options. The final USD proceeds in scenario A are approximately 1.38 million USD.
In scenario B, with a forecasted exchange rate of 0.6525 USD per AUD representing a 10% depreciation of the AUD, we can hedge by acquiring call options with an exercise price of 0.725 USD per AUD and a premium of $0.023 USD per AUD.
By applying the same calculation method, the USD proceeds in scenario B would be around 1.40 million USD with an option hedge strategy.