70.2K

Verified Solution

Link Copied!

Chronos Time Pieces. Chronos Time Pieces of Boston exports watches to many countries, selling in local currencies to stores and distributors. Chronos prides itself on being financially

conservative. At least $70\%$ of each individual transaction exposure is hedged, mostly in the forward market, but occasionally with options. Chronos' foreign exchange policy is such that the $70\%$

hedge may be increased up to a $120\%$ hedge if devaluation or depreciation appears imminent. Chronos has just shipped to its major North American distributor. It has issued a $90-$day invoice to its

buyer for $1,510,000.$ The current spot rate is $$\frac{1\mathrm{.}2217}{},$ the $90-$day forward rate is $$\frac{1\mathrm{.}2287}{}.$ Chronos' treasurer, Manny Hernandez, has a very good track record in predicting exchange rate

movements. He currently believes the euro will weaken against the dollar in the coming $90$ to $120$ days, possibly to around $$\frac{1\mathrm{.}1503}{}.$

a$.$ Evaluate the hedging alternatives for Chronos if Manny is right $($Case $1$: $$\frac{1\mathrm{.}1503}{})$ and if Manny is wrong $($Case $2$:$$\frac{1\mathrm{.}2639}{}).$ What do you recommend?

b$.$ What does it mean to hedge $120\%$ of a transaction exposure?

c$.$ What would be considered the most conservative transaction exposure management policy by a firm? How does Chronos compare?

a$.$ Case $1$: Manny is right and the spot rate in $90$ days is $$\frac{1\mathrm{.}1503}{}.$

How much in U$.$S$.$ dollars will Chronos receive in $90$ days if $100\%$ of the transaction exposure is hedged with the forward contract?

$

$($Round to the nearest dollar.$)$

Answer & Explanation Solved by verified expert

See Answer