Treasury and Risk Management Of ABC Samples †MyAssignmenthelp.com

Question: Discuss about the Treasury and Risk Management Of ABC. Answer: ABC unhedged strategy: Strategy (Un-Hedge) Value Value Profit/loss Comment Payment in 1 year 50,000,000 Spot rate $ 1.100 $ 55,000,000.0 Future Spot rate $ 0.800 $ 40,000,000.0 $ (15,000,000.0) Hedge is Unsuccessful Future Spot rate $ 0.900 $ 45,000,000.0 $ (10,000,000.0) Hedge is Unsuccessful Future Spot rate $ 1.050 $ 52,500,000.0 $ (2,500,000.0) Hedge is Unsuccessful Future Spot rate $ 1.130 $ 56,500,000.0 $ 1,500,000.0 Hedge is Successful Future Spot rate $ 1.200 $ 60,000,000.0 $ 5,000,000.0 Hedge is Successful Future Spot rate $ 1.250 $ 62,500,000.0 $ 7,500,000.0 Hedge is Successful Future Spot rate $ 1.300 $ 65,000,000.0 $ 10,000,000.0 Hedge is Successful ABC Forward hedge strategy: Strategy (Forward hedge) Value Value Profit/loss Comment Payment in 1 year 50,000,000.0 Forward rate $ 1.130 $ 56,500,000.0 Future Spot rate $ 0.800 $ 40,000,000.0 $ 16,500,000.0 Hedge is Successful Future Spot rate $ 0.900 $ 45,000,000.0 $ 11,500,000.0 Hedge is Successful Future Spot rate $ 1.050 $ 52,500,000.0 $ 4,000,000.0 Hedge is Successful Future Spot rate $ 1.130 $ 56,500,000.0 $ - Hedge is Successful Future Spot rate $ 1.200 $ 60,000,000.0 Hedge is Unsuccessful Future Spot rate $ 1.250 $ 62,500,000.0 Hedge is Unsuccessful Future Spot rate $ 1.300 $ 65,000,000.0 Hedge is Unsuccessul ABC Money Market hedge strategy: Strategy (Money market hedge) Value Value Profit/loss Comment Payment in 1 year 50,000,000.0 Interest in Euro 2.000% 980,392.2 Amount in euros borrowed 49,019,607.8 Spot rate $ 1.100 $ 53,921,568.6 interest in US 5.500% $ 2,965,686.3 Total payment received in 1 yr $ 56,887,254.9 Future Spot rate $ 0.800 $ 40,000,000.0 $ 16,887,254.9 Hedge is Successful Future Spot rate $ 0.900 $ 45,000,000.0 $ 11,887,254.9 Hedge is Successful Future Spot rate $ 1.050 $ 52,500,000.0 $ 4,387,254.9 Hedge is Successful Future Spot rate $ 1.130 $ 56,500,000.0 $ 387,254.9 Hedge is Successful Future Spot rate $ 1.200 $ 60,000,000.0 Hedge is Unsuccessful Future Spot rate $ 1.250 $ 62,500,000.0 Hedge is Unsuccessful Future Spot rate $ 1.300 $ 65,000,000.0 Hedge is Unsuccessful ABC Option hedge strategy: Strategy (Option Hedge Put Option) Value Value Profit/loss Comment Payment in 1 year 50,000,000.0 Put option 1.110 Exercise price 0.060 Total value of put option 1.050 $ 52,500,000.0 Future Spot rate $ 0.800 $ 40,000,000.0 $ 12,500,000.0 exercise Future Spot rate $ 0.900 $ 45,000,000.0 $ 7,500,000.0 exercise Future Spot rate $ 1.050 $ 52,500,000.0 $ - exercise Future Spot rate $ 1.130 $ 56,500,000.0 $ (4,000,000.0) Do not exercise Future Spot rate $ 1.200 $ 60,000,000.0 $ (7,500,000.0) Do not exercise Future Spot rate $ 1.250 $ 62,500,000.0 $ (10,000,000.0) Do not exercise Future Spot rate $ 1.300 $ 65,000,000.0 $ (12,500,000.0) Do not exercise Strategy (Option Hedge Call Option) Value Value Profit/loss Comment Payment in 1 year 50,000,000.0 Cal option 1.150 Exercise price 0.080 Total value of put option 1.070 $ 53,500,000.0 Future Spot rate $ 0.800 $ 40,000,000.0 $ (13,500,000.0) Do not exercise Future Spot rate $ 0.900 $ 45,000,000.0 $ (8,500,000.0) Do not exercise Future Spot rate $ 1.050 $ 52,500,000.0 $ (1,000,000.0) Do not exercise Future Spot rate $ 1.130 $ 56,500,000.0 $ 3,000,000.0 exercise Future Spot rate $ 1.200 $ 60,000,000.0 $ 6,500,000.0 exercise Future Spot rate $ 1.250 $ 62,500,000.0 $ 9,000,000.0 exercise Future Spot rate $ 1.300 $ 65,000,000.0 $ 11,500,000.0 exercise Optimal hedge for ABC: Hedging Strategies Potential profit range Potential profit range Strategy (Un-Hedge) $ 10,000,000.00 $ (15,000,000.00) Strategy (Forward hedge) $ 16,500,000.00 $ - Strategy (Money market hedge) $ 16,887,254.90 $ 387,254.90 Strategy (Option Hedge Put Option) $ 12,500,000.00 $ - Strategy (Option Hedge Call Option) $ 11,500,000.00 $ 3,000,000.00 The above table depicts the optimal hedge strategy that could be used by ABC company for hedging the exposure in the currency market. Moreover, money market hedge is putting the viable approach of providing the highest potential profits that could be generated from currency Hedge. The other methods of hedging do not provide adequate profits from the currency conversion (Balc?lar et al. 2016). Therefore, ABC company can use money market hedge to reduce the relevant risk from currency conversion after one year. References Bakke, T.E., Mahmudi, H., Fernando, C.S. and Salas, J.M., 2016. The causal effect of option pay on corporate risk management.Journal of Financial Economics,120(3), pp.623-643. Balc?lar, M., Demirer, R., Hammoudeh, S. and Nguyen, D.K., 2016. Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk.Energy Economics,54, pp.159-172. Brooks, R., 2015.Financial management: core concepts. Pearson. DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks.Journal of Financial Economics,116(2), pp.219-236. Hopkin, P., 2017.Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers. Jimnez, M.A., Gaxiola, A., Armesto, J.J., Gonzlez-Browne, C., Meserve, P.L., Kelt, D.A., Gutirrez, J.R. and Jaksic, F.M., 2016. Bet-hedging strategies of native and exotic annuals promote coexistence in semiarid Chile.Journal of Arid Environments,126, pp.62-67. Martinez-Garcia, R. and Tarnita, C.E., 2017. Seasonality can induce coexistence of multiple bet-hedging strategies in Dictyostelium discoideum via storage effect.Journal of theoretical biology,426, pp.104-116. Mensi, W., Hammoudeh, S. and Yoon, S.M., 2015. Structural breaks, dynamic correlations, asymmetric volatility transmission, and hedging strategies for petroleum prices and USD exchange rate.Energy Economics,48, pp.46-60.