Discuss if northwind should hedge its transaction exposure

Assignment Help Corporate Finance
Reference no: EM13656512

Question :On June 1, Northwind Energy, a wholly owned subsidiary of GE, sold a 12 megawatt compression turbine to Groningen Engineering of the Netherlands for ?4,000,000, payable ?2,000,000 on September 1 and ?2,000,000 on December

1. The Northwind sales team derived its price quote of ?4,000,000 on May 1 by dividing its normal U.S. dollar sales price of $4.320,000 by the then current spot rate of $1.0800/?.

By the time the order was received and booked on June 1, the euro had strengthened to $1.1000/?, so the sale was in fact worth ?4,000,000 x $1.1000/? = $4,400,000. Northwind had already gained an extra $80,000 from favorable exchange rate movements. Nevertheless, Northwind's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro.

Four approaches were possible:

Hedge in the forward market. The three-month forward exchange quote was $1.1060/? and the six-month forward quote was $1.1130/?.

Hedge in the money market. Northwind could borrow euros from the Frankfurt branch of its U.S. bank at 8.00% per annum.

Hedge with foreign currency options. September put options were available at strike price of $1.1000/? for a premium of 2.0% per contract, and December put options were available at $1.1000/? for a premium of 1.2%. September call options at $1.1000/? could be purchased for a premium of 3.0%, and December call options at $1.1000/? were available at a 2.6% premium.

Do nothing. Northwind could wait until the sales proceeds were received in June and September, hope the recent strengthening of the euro would continue, and sell the euros received for dollars in the spot market.

Assumptions

Values

90-day forward rate, $/?

$1.1060

180-day forward rate, $/?

$1.1130

U.S. Treasury bill rate

3.600%

Northwind''s borrowing rate, euros, per annum

8.000%

Northwind''s cost of equity

12.000%

a) Discuss if Northwind should hedge its transaction exposure of EUR 4,000,000. If you recommend that the company should hedge, which of the hedging alternatives would better serve Northwind shareholders?

b) Northwind circumstance has changed. If Northwind can borrow at 2% per annum in Europe and need the proceed to invest in the U.S. in a short term project using its WACC rate, which alternative would be better for the company?

Reference no: EM13656512

Questions Cloud

A transparent oil with index of refraction : A transparent oil with index of refraction 1.29 spills on the surface of water (index of refraction 1.33), producing a maximum of reflection with generally incident red light (wavelength 700 nm in air). Assuming the maximum occurs in the first order;..
What is the price elasticity of demand compares : What is the price elasticity of demand compares the percent change in quantity demanded relative to the percent change in price - this is done by taking the change in quantity demanded by the change in price.
Windows operating system : Windows operating system
Computing chips : Computing Chips
Discuss if northwind should hedge its transaction exposure : Discuss if Northwind should hedge its transaction exposure of EUR 4,000,000. If you recommend that the company should hedge, which of the hedging alternatives would better serve Northwind shareholders?
A recreational hot air balloon has a volume : A recreational (open) hot air balloon (i.e., Pinside is approximately the same as Poutside) has a volume of 2187 m3 when fully inflated. The total weight of the basket, balloon, ballast and pilot is 1756.0 N (395 lb).
Professional position announcement in engineering discipline : Write a one-page summary of the requirements, qualifications, and/or skills the five employers are seeking in the candidates, indicating which ones you currently lack.
What were the materials used in the implant : What were the materials used in the implant? What were the advantages of the materials used and what was the surface texture of these implants? How did this contribute to the biocompatibility of the implant?
Part of the hipaa privacy rule : True or Flase. As a patient, your doctor must sign a HIPAA Consent and Release Form to share your ePHI or PHI with insurance providers who pay for your medical bills. This is part of the HIPAA Privacy Rule.

Reviews

Write a Review

Corporate Finance Questions & Answers

  Impact of the global economic crisis on business environment

This paper reviews the article of ‘the impact of the global economic crisis on the business environment' that is written by Roman & Sargu (2011).

  Explain the short and the long-run effects on real output

Explain the short and the long-run effects on real output, price, and unemployment

  Examine the requirements for measuring assets

Examine the needs for measuring assets at fair value in accounting standards

  Financial analysis report driven by rigorous ratio analysis

Financial analysis report driven by rigorous ratio analysis

  Calculate the value of the merged company

Calculate the value of the merged company, the gains (losses) to each group of shareholders, NPV of the deal under different payment methods. Synergy remains the same regardless of payment method.

  Stock market project

Select five companies for the purpose of tracking the stock market, preparing research on the companies, and preparing company reports.

  Write paper on financial analysis and business analysis

Write paper on financial analysis and business analysis

  Intermediate finance

Presence of the taxes increase or decrease the value of the firm

  Average price-earnings ratio

What is the value per share of the company's stock

  Determine the financial consequences

Show by calculation the net present value for the three alternatives (no education, network design certification, mba). Also, according to NPV suggest which alternative you advise your friend to choose

  Prepare a spread sheet model

Prepare a spread sheet model for the client that determines NPV/IRR with and without tax.

  Principles and tools for financial decision-making

Principles and tools for financial decision-making. Analyse the concept of corporate capital structure and compute cost of capital.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd