International Finance and Banking Case Study Example | Topics and Well Written Essays - 750 words

International Finance and Banking - Case Study Example Using the corporate spot rate, the cash inflow will be equivalent to 30,375,000/1.04 MYR. By converting these into dollars it is equivalent to 29,206,730*0.305 = $8,908,053. For three months this is equivalent to 8,908,053*1.035 = $9,219,835. The three month forward rate will be an equivalent of $8,762,019*1.035 = $9,068,690. Yankee has two hedging alternatives for the EUR receivable includes the option to sell the product at the current spot rate of $1.355 per euro or three month forward rate at $1.355 per euro. By discounting the amount receivable in three months, the gain from the sales is equivalent to thirty six million Euros. Using the current spot rate, thirty six million Euros accumulated for three months is equivalent to 36,000,000* 1.35 = $48,600,000. If Yankee uses three month forward rate, this amount will be equivalent to 36,000,000*1.355 = $48,780,000 in three months. I think it is easier for Yankee to hedge its outflows and inflows denominated in foreign currencies because the outflows of Yankees are responsive to payable amount denominated in foreign currency in respect to current changes in currency exchange in the market and the future currency values. Therefore, since Yankee has formed a two years agreement with the two clients the inflows and outflows will be only affected by changes in currency value (Tarullo, 2008). There is no need for Yankee to over the hedge in regard to question 2 above. Even though Yankee could over hedge the put option under normal situation, Johnson wishes to hedge the total coverage and has only 125,000 pounds in a put option. Since Yankee will receive 36,000,000 pounds in three months it means that the client will be required to purchase 288 put options so that they can completely cover disclosure. Since Yankee has formed an agreement for exporting the products to the two clients in the foreign countries over hedging is not an option in the month forward rate.