1. Hedging transaction exposure. Popescu, Hagi & Associates
Milagros Chavez Valdivia
Sayyada Vazir

2. Introduction
Popescu, Hagi & Associates (PHA) is a consulting firm that specializes in derivatives.
DW Inc., a manufacturing company hires PHA to help create a predictable cost structure.
DW orders parts from Japan at a cost of 200,000,000 JPY
Parts will be delivered in March.
Estimated payment April 17.

3. PART I. December 6, 2012 Normal Distribution Simulation
Best - Worst case scenario: 2,126,263 USD - 2,759,661 USD
VaR(99%): 2,690,054 USD
Simulation
VaR(99%): 2,759,661 USD

4. PART I. December 6, 2012 PHLX Options
Total amount to be paid: 200,000,000 JPY
1,000,000 JPY = 1 contract
Number of contracts = 200
PHLX Options (premium in cents per unit):
Call
Put
JPY June 0.008
JPY June 0.009
JPY June 0.010

5. PART I. December 6, 2012 PHLX Options (Cont.)
Total Premium = Rate/100 * 200,000,000
Carrying Cost = Total Premium * (Daily interest rate/100*Time)
Daily interest rate =
Time = 132 days from 12/6/2012 to 4/17/2013
PHLX
JPY June 0.008
JPY June 0.009
JPY June 0.010
Total premium paid in USD
916,600.00
725,100.00
590,840.00
Carrying cost (CC) USD
2,433.94
1,925.43
1,568.92
Total premium cost
919,033.94
727,025.43
592,408.92

6. PART I. December 6, 2012 PHLX Options (Cont.) St < .008
Cash Flow
St*(200,000,000 JPY)
1,600,000
1,800,000
2,000,000
Premium
919, USD
727, USD
592, USD
Total Cash Flow
(St*(200,000,000)+
919,033.34) USD
2,519, USD
(St*(200,000,000)+ 727,025.43) USD
2,527, USD
(St*(200,000,000)+ 592,408.92) USD
2,592, USD

7. PART I. December 6, 2012 OTC Options: OTC Strike price 0.009
Total premium paid in USD
816,200.00
639,520.00
Carrying cost (CC) USD
2,167.34
1,698.18
Total premium cost
818,367.34
641,218.18

8. PART I. December 6, 2012 OTC Options (cont.): St < .009
Cash Flow
St*(200,000,000 JPY)
1,800,000
2,000,000
Premium
818,367 USD
641,218 USD
Total Cash Flow
(St*(200,000,000)+
818,367.34) USD
2,618,367 USD
(St*(200,000,000)+ 727,025.43) USD
2,641,218 USD

9. PART I. December 6, 2012 Forwards:
Total amount to be paid= 200,000,000 JPY
Spot rate = USD/JPY
3-mo USD Interest rate (%) = Daily USD Interest rate (%) =
3-mo JPY Interest rate (%) = Daily USD Interest rate (%) =
Forward (132 days) = USD/JPY
On April 17, we will pay with certainty = 2,496,928 USD

10. PART I. December 6, 2012

11. PART II. May 6, 2013 Parts arrived on April 11, 2013
Payment is due in 5 days on May 11, 2013
Spot rate is USD/JPY

12. PART II. May 6, 2013
Effective total cost (USD) using 3-months Forwards
Rate of 3 month forward contract on December 6, 2012 is USD/JPY
2,498,800 USD will be payable on March 6th, 2013
DW can then invest the 200,000,000 JPY for 2 months to earn interest
Daily interest rate = /180 =
200,000,000 * ( /100*60) = 101, JPY earned in 60 days
101, * = 1, USD
Total cost = 2,498,800 -1, = 2,497, USD

13. PART II. May 6, 2013
Effective total cost (USD) using 6-months Forwards
Rate of 6 month forward contract on December 6, 2012 is USD/JPY
2,512,200 USD payable on June 6, 2013
On May 6, 2013 sell a 1 month forward at a rate of USD/JPY
At expiration, 419,400 USD receivable
Today’s value of receivable = 419,019 USD
Total cost = 2,093,181 USD

14. PART II. May 6, 2013 Effective total cost (USD) using June Futures
Total amount to pay on May 11, (JPY) is 200,000,000 JPY
16 contracts valued at 12,500,000 JPY each
Spot rate December 6 (USD/JPY) is
Total cost = 2,466,400 USD
6-Dec-12
6-May-13 Vt
200,000,000 V*
2,494,000
2,008,000 St
Ft,6-mo

15. PART II. May 6, 2013 Effective total cost (USD) using OTC JPY Options
Call option with Strike price .009 at cost
( /100)*200,000,000 = 816,200 USD Cost
Carrying cost = 1, USD
Spot rate in May is = USD/JPY
Exercise since strike price is lower than exercise price
Total price = (200,000,000*.009) + (816,200+2,167.34) = 2,618, USD
Call option with Strike price .010 at cost
( /100)*200,000,000 = 639,520 USD Cost
Carrying cost = USD
Total price = (200,000,000*.010) + (639,520+1,698.18) = 2,641, USD

16. PART II. May 6, 2013 Effective total cost (USD) using JPY June Options
>0.008 USD/JPY
>0.009 USD/JPY
>0.010 USD/JPY
2,519,034
2,527,025
2,592,409

17. PART II. May 6, 2013 Effective total cost (USD) leaving position open
Spot rate May, 2013 = JPY/USD
Spot rate May, 2013 = USD/JPY
Total Cost = 200,000,000 * = 1,983,537 USD