Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch ...
Merrill case final
-
Upload
hongfeng-wu -
Category
Documents
-
view
1.877 -
download
3
Transcript of Merrill case final
Multinational Finance Management
‘The Merrill Case’
Presentation by: Yu Zhang, Juan Leon Sanchez, Francisco Magro Ruiz,
Hongfeng Wu and Hasan Soylemez
February 22, 2013
2
Index
Introduction
Problems
Solutions and Options
Comparison
Conclusion and Recommendation
3
Introduction
• Merrill Electronics Cooperation (MEC) was founded in 1950 by Thomas Merrill
• After his death, Patricia Merrill inherited the 75 % of the share capital together with her mother
• In 1984, MEC signed an agreement with Goldstone Corporation in Taiwan, which was a major producer of electronic devices
• In mid-1980’s, MEC entered the fast-growing market PC market which was becoming more and more competitive each day
• In 1989, it became a national distributor for Fuji Electronics
• Yen-dominated purchases exceeded $ 20 million during the past 12 months
• Due to growing volume in the market, further Yen purchases was foresaw
4
Problems
• High volatility of the Japanese Yen
• The payment problem: 90-day currency risk exposure (60 days shipping + 30 days grace period of payment after delivery)
• Average of 6.1¥/$ difference for a 3-month period with the average spot rate of 130.83¥/$ (Exhibit 4)
• Most of the equipment were imported from Japan
• Further Yen purchases were foreseen
• Most of the Japanese suppliers insisted on invoicing in Yen
• More sensitive to currency risk than competitors
5
Options
• No-hedge
• Lock-in exchange rate
• Forward contract hedge
• Money market hedge
• Yen futures hedge
• Options contract
6
Options
Historical Data and Analysis
Scenarios
Pros and Cons
7
Options
0 1 2 3 4 5 6 7 8 9 10 11 12 115
120
125
130
135
140 *Exchange Rate Yen/USD
• A trend of Yen appreciation against the USD with an average annual rate of +10%.
• High probability that the trend will prevail for the future.
What does the historical data show and imply?
*See Exhibit 4
8
Options
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains same
124.6 ¥/$
Scenario 2
Yen Depreciates by 3%
128.338 ¥/$
Scenario 3
Yen Appreciates by 3%
120.862 ¥/$
Assumptions: • Historical trend shows that the annual appreciation of
¥/$ was app. 10%• Therefore, appreciation/depreciation of ¥/$ would be
app. +/-3% for 3 months• No-hedge: Continue buying Yen at the spot market each
time a payment has to be made
9
Options - No-hedge
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778¥225 million
$1,753,183¥225 million
$1,861,627¥225 million
10
Options - No-hedge
Pros Cons
If Yen depreciates, the company can gain from
lower cost of goods
If Yen appreciates, the company may suffer from higher cost of
goods
Costs almost nothing (No premiums, fees
etc.)
Exchange rates can not be precisely predicted
Easy to implement, no need for specialized
financial staff
Market conditions make it harder to put sound
exchange rate forecasts
Completely vulnerable to market volatilities
11
Options - Forward Contract
Forward contracts are agreements between two parties which require delivery of one currency at a specified future date of a specified amount of another currency.
• Exchange rate fixed between the parties1st step
• Time
2nd step • Buy the
currency at the price set in the 1st step
3rd step
12
Options - Forward Contract
BID ASK
Spot rate(Yen per USD)
124.60 124.70
Forward rate(Yen per USD)
124.95 125.10
BID: The rate at which bank sells YEN
ASK: The rate at which bank buys YEN
The company needs to buy YEN;
¥225 million on the forward market:
225,000,000 / 124.95 = $ 1,800,720
13
Options - Forward Contract
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778$1,800,720
$1,753,183$1,800,720
$1,861,627$1,800,720
14
Options - Forward Contract
Pros Cons
No internal costsYou are responsible to fulfill the contract
and tied-up
Minimize the risk of the currency operations
You will be unable to benefit from any
positive movements in the foreign exchange rate
Amount and date adapted to individual
requirementsIt can’t be traded
15
Options - Money Market Hedge
Merrill would buy the YEN at today’s spot market and place it in a YEN time deposit or another YEN asset until the due date.
Deposit Credit
90-days Euroyen interest rates 4.3125 % p.a.
4.4375% p.a.
90-days Eurodollar interest rates*
3.3750% p.a. 3.5000% p.a.
Merrill’s short term borrowing rate is 6.00% + 25 bps
Transactions:1-) The YEN amount needed to deposit in order to have 225M by October: 225,000,000 / (1+0.01078125) = ¥ 222,600,0932-) Borrow from the bank in USD (6.0025% / 4 = 1.500625%) 3-) Convert the USD to YEN as of today: ¥ 222,600,093 / 124.60 = $1,786,5184-) Time deposit the YEN until the payment date5-) Pay the bank back in USD, and the supplier in YEN;USD amount needed along with the interest: $ 1,786,518 * 1.01500625 = $ 1,813,327
16
Options - Money Market Hedge
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778$1,813,327
$1,753,183$1,813,327
$1,861,627$1,813,327
17
Options - Money Market Hedge
Pros Cons
Highly profitability if enough cash available
High complexity of calculation
No exchange rate risk Volatility of money-markets
Generate profits if loan interest < deposit
interest
Dealing with Japanese financial market
Possibility of short term investments
Loan interest pose additional cost
No penalties for fast withdrawing
Opportunity costs may occur if USD appreciates
18
Options - Yen Future Hedge
International Monetary Market (IMM) provided the data:
$ per ¥100 ¥ per $1
September yen futures (IMM) 0.8046 124.285
December yen futures (IMM) 0.8036 124.440
Other Data :
Standard Future size = ¥ 12,5 million per contract
Broker’s fee = $1,500 per contract
Total ¥225 million
19
Options - Yen Future Hedge
Calculations:
How much $ should pay for the futures contract?
¥225,000,000 / 124.440 = $1,808,100
How much futures contracts should be needed? ¥225,000,000 / 12,500,000 = 18 futures contracts
How much should we pay for the Broker’s Commission ? $1,500 * 18 contracts = $27,000
So, the total cost of future contracts including commission is: $1,808,100 + $27,000 = $1,835,100
20
Options - Yen Future Hedge
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778$1,835,100
$1,753,183$1,835,100
$1,861,627$1,835,100
21
Options - Yen Future Hedge
Pros Cons
Standardized contracts
No tailoring of individual needs
Possibility of trading Broker commission
Safe method Margin account is required
Possibility to reduce exchange rate risks
22
Options - Currency Option Contract
This contract gives the right but not the obligation to buy (call) or to sell (put) currency or some other asset within a specified
period and at a predetermined price.
Types of currency options:“European”-type options“American”-type options
23
Options - Currency Option Contract
October yen call options (IMM)
$ per 100 ¥ ¥ per $
Strike price 0.800 125
Premium price 0.0170 5882.35
Provided yen amount
225 million ¥ 225 million ¥
CALCULATIONS:
- Buy call options = ¥225,000,000 x 0.008 = $1,800,000
- Premium cost = ¥225,000,000 x 0.00017 = $ 38,250
- Total cost = $1,800,000 + $ 38,250= $1,838,250
24
Options - Currency Option Contract
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778$1,838,250
$1,753,183$1,838,250
$1,861,627$1,838,250
25
Options - Currency Option Contract
Pros Cons
Not obligatory All have an expiration date
High flexibility Pre-paid premiums and fees
Unexpected market conditions only leads to a loss of the premium
Buying out of the contract leads to a loss of the premium already paid
26
Comparison
Options
Scenario 1Current Spot Rate Remains
the Same124.60 ¥/$
Scenario 2Yen
depreciates by -3%
128.34 ¥/$
Scenario 3Yen
appreciates by +3%
120.86 ¥/$
Do Nothing - +52,595 USD -55,849 USD
Forward -5,058 USD -47,537 USD +60,907 USD
Money Market Hedge
-7,548 USD -60,144 USD +48,301 USD
Futures -29,322 USD -81,917 USD +26,527 USD
Currency Options
- 32,472 USD -38,250 USD +23,377 USD
27
Conclusion and Recommendation
1. Shall the trend of Yen appreciation against USD continue, the best hedging option is locking-in a forward rate agreement with the bank due to the potential gain compared to the other alternatives and easy format of implementation.
2. On the other hand, shall Yen depreciate against USD, then simply doing nothing would suffice and be the best hedging option.
3. Options contracts should also be considered since they can be not exercised if Yen depreciates against USD. In such a case, only the commission would be lost.
4. All in all, even the best option is highly dependent on the expected exchange rate and an accurate prediction can never be made.
28
Thank you!