OSG CORPORATION: HEDGING TRANSACTION EXPOSURE
(provided as a separate file)
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?
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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