mefielding.com 1

Currency HedgingMJY plc December 05

Mark Fielding-Pritchard

mefielding.com 2

MJY We can ignore £s as we are British

Receive $ €

MJY 140 75

Sub 1 60 177

Sub 2 30 87

Total 230 339

Pay $ €

MJY 290 72

Sub 1 0 85

Sub 2 50 85

Total 340 242

Hedging 110 Payment 97 Receipts

Mistake in question!!MJYs payments are 120 + 170!!

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MJY- Payment $110 Forward We need dollars to make payment in 3 months

110000/1.7835= £61676 payable in 3 months

Option

We need to sell pounds (pound is foreign currency as exchange in in US)- Puts

February puts will close in February so we need May, use (or not in March)

We need one

Strike Including Premium

1.80 0.0534 1.7466

1.78 0.042 1.7380

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MJY- Payment $110 Option MJY will give pounds, they want to receive as many dollars as possible for

each pound so hey will choose $1.80 (which is why it is the most expensive)

Premium cost $0.0534 x 62500= $3338 @1.7982 = £1856 Assuming we exchange the cost will be £62500 which gives us $112500 We pay $110000 then exchange $2500 back at spot (assume 1.7861)=

£1400

Net option outflows 1856 + 62500- 1400= £62956

Forward £ 61676 So we use forward

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MJY- Receipt €97

Forward

(97000/1.4390)= £67408

Only possibility in question

mefielding.com 6

Warren Buffett- Derivatives

Advantages

Allow risk mitigation

Can be cheap

Liquid

Accounts require mark to markets

Accounts require disclosures

Disadvantages

Used for speculation

Used by people who don’t understand them

Full risks may be unmeasurable

Market crashes may give unforeseen consequences

IT trading systems can introduce illogical decisions

New derivatives introduced so fast that risk departments don’t understand what has happened