Multinational corp finance<\/p>\n
On June 1, Northwind Energy, a wholly owned subsidiary of GE, bought a 12 megawatt compression turbine from Groningen Engineering of the Netherlands for \ufffd\ufffd\ufffd4,000,000,<\/p>\n
payable on September 1. The Northwind purchasing team received this price quote of \ufffd\ufffd\ufffd4,000,000 on May 1 where the current spot rate was $1.0800\/\ufffd\ufffd\ufffd, which equates to the<\/p>\n
U.S. dollar price of $4,320,000.<\/p>\n
By the time the purchase was made on June 1, the euro had strengthened to $1.1000\/\ufffd\ufffd\ufffd, so<\/p>\n
the purchase was in fact worth \ufffd\ufffd\ufffd4,000,000 x $1.1000\/\ufffd\ufffd\ufffd = $4,400,000. Northwind had already lost an extra $80,000 from the unfavorable exchange rate movements. With<\/p>\n
this, Northwind\ufffd\ufffd\ufffds director of finance now wondered if the firm should hedge against more fluctuation in the exchange rate.<\/p>\n
Three approaches were possible:
\n1) Hedge in the forward market. The three-month forward exchange quote was $1.1060\/\ufffd\ufffd\ufffd.
\n2) Hedge in the money market. Northwind could borrow U.S. dollars from its U.S. bank at 7.00% per annum. The EU investment rate is 6.00% per annum.
\n3) Hedge with foreign currency options. September put options were available at strike price of $1.1000\/\ufffd\ufffd\ufffd for a premium of 3.0% per contract. September call options at<\/p>\n
$1.1000\/\ufffd\ufffd\ufffd could be purchased for a premium of 2.0%.<\/p>\n
Discuss if Northwind should hedge its<\/p>\n
transaction exposure of EUR 4,000,000. If you recommend that the company should hedge, which of the hedging alternatives would better serve Northwind shareholders?<\/p>\n","protected":false},"excerpt":{"rendered":"
Multinational corp finance On June 1, Northwind Energy, a wholly owned subsidiary of GE, bought a 12 megawatt compression turbine from Groningen Engineering of the Netherlands for \ufffd\ufffd\ufffd4,000,000, payable on September 1. The Northwind purchasing team received this price quote Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-6956","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/6956","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=6956"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/6956\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=6956"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=6956"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=6956"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}