OSG Corporation Hedging Transaction Exposure Case Solution

Case ID: HKU618
Solution ID: 2831

Words: 1522

Price: $19

Case Solution

In Tokyo on Monday, April 24th, 2006, the U.S. dollar tumbled to a three-month low compared to the yen, extending its shortcoming from Friday's exchanging in New York, where it had fallen more than two yen (1.75%). Mr. TeruhideOsawa, president of OSG Corporation in Japan (OSG), a conglomerate cutting-device maker, was tracing the foreign exchange showcase on his PC screen that Monday and was exceptionally stunned to see that the yen had been overvalued 1.75% in one day. He thought about whether such a major change would bring about issues for the organization's business. Confronted with enormous vacillations in the yen-dollar conversion scale, he summoned the director of the Support Center Finance Group, requesting that he break down and provide details regarding how OSG's remote cash exchange introduction was measured, and how it could be overseen. He asked the chief particularly how the organization was as of now supporting its outside money exposures. The Finance Group gave a presentation at a meeting of the governing body on May 29th, 2006. They disclosed that keeping in mind the end goal to take out fleeting exchange presentation, a mixed bag of supporting techniques were accessible at different expenses to the organization. After the presentation by the Finance Group, individuals from the board got into aggressive arguments.

Excel Calculations

i) Forward Contracts

ii) Money market Hedging

iii) Options

Total end of period value for OSG

a. The amount of forward cover required

b. Amount in US dollars, covered and uncovered

c. Expected total end-of-period yen value

No forward contract

Forward contract

Book Value

period end

Foreign exchange profit and loss

Foreign Currency

Yen Equivalent

Spot rate, Yen

Questions Covered

1. Explain non-hedging techniques for OSG to minimize transaction exposure, if any.

2. What are the costs of alternatives for reducing short term foreign currency risk? Assume OSG has an account receivable of US$1 million. Use the information provided in Appendix 1 for this account payable case of US$1 million to a US company. Which of the possible hedging methods presented in the case should OSG use if they expect the dollar to depreciate versus the yen during the next three months? Use the information provided in Exhibit 10.

3. Suppose that OSG undertakes the same mandatory hedging policy as S. Corporation, the American company whose minimum forward-cover schedule is shown in Exhibit 9. Apply this schedule to the US$1 million account receivable case for OSG and find the expected total end-of-period value of the position taken by OSG. OSG expected to receive a US dollar (foreign currency) payment of US$1 million in three months. The spot rate was 115.03/$, and the forward rate 116.18/$ as shown in Appendix 1. Use Exhibit 10 for minimum forward-cover. Note that the yen is the home currency for OSG.

a. What would be the amount of forward cover required?

b. If the spot rate in three months was expected to be 110.00/$, what would be the amount in US dollars, covered and uncovered?

C. What would be the expected total end-of-period yen value of the position taken in part (b)? Suppose the spot rate in three months will be 115.00/$.

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