Hedging
Hedging refers to strategies used to minimize the risk of making losses during transactions involving exchange of foreign currencies (Madura, 2008). These techniques are mostly used by multinational corporations who engage in foreign trade. In that case, exchange rate fluctuations may impact on profits. Hedging is some form insuring revenues from exchange rate fluctuations.
QN1. Compare the hedging alternatives for the THB with a scenario under which Blades remains un-hedged. Do you think Blades should hedge or remain un-hedged? If Blades should hedge, which hedge is most appropriate?
Net Baht to be paid/received in 3 months = 45,000 pairs × 4,594 per pair =206,730,000
Baht outflows ………………………..18,000 (pairs) × 3000 (Cost per…show more content… The option hedge will not give a higher dollar revenue that the money market strategy.
QN.3 In general, do you think Blade should continue to hedge its inflows or outflows denominated in foreign currency?…show more content… The reason for this is that the company’s outflows are exposed to two uncertain variables. The first variable is the total amount of payables whose denomination is in the foreign currency. These are exposed to market price fluctuations and changes. The other variable is the changes that could be experienced in future exchange rates. In the existing scenario, Blade has existing agreements with buyers regarding prices for its exports. Therefore, the inflows are faced with uncertainties due to potential changes in future exchange rates.
QN.4 Would any of the hedges you compared in Question2 for the GBP to be received in three months require Blades to over hedge? Given Blades’ exporting arrangements, do you think it is subject to over hedging with a money market hedge?
In none of the hedging scenario discussed in question 2 would Blade be required to over hedge. In the case of a put option hedge, Blades Inc would be forced to over hedge. This is because the put option has 31,250 pounds and Ben Holt in that case wants to hedge the whole amount that is exposed. To fully cover the exposure, Blades will need to purchase 128 put options on receiving 4,000,000 at the end of three