VSC case
3) After analyzing Peter’s choice of using the spot rate on April, we agreed that he took the right decision. When Peter offered his bid to the American firm on April 1st, he did not know the period of time that it was going to take them to accept the bid and either reject it or make the payment. As a consequence, he doesn’t know if he is going to get the money or when he is going to get it. Therefore, if he would have choose to do a forward or a future contract hedge, it wouldn’t have been convenient since he was obligated to sell U.S. dollars on a specific day. What would have been a good option was to sell an American put option of US $161,030,000 with an expiration date of December 2008. This would allow Peter to hedge against his expected depreciation of the U.S dollar but doesn’t force him to sell the U.S dollar in the future in case if the American firm decides to turn down on the bid.
We think that the real mark up is 12% - 0.35 %= 11.65% since the “performance bond would cost 0.35 percent of the contract,” and VSC was planning on a “modest markup of 12 percent.”
4) Some of the hedging alternatives for Vanguard Security Corporation are the following ones:
1) Forward Currency contract:
Vanguard Security Corporation could arrange with its bank a forward contract on a stated date in the future. This is a non-standardized hedging option that it could be used as an advantage for the company because the remaining amount of dollars could be hedge on November 17th. The six-month forward rate is US $1.4650 = 1 €, and the remaining amount is a total of US $144.927 mil. VSC would get: $144.927mil/1.4650 = €98,926,279.86
2) Foreign Currency Future Contract:
Another type of hedging that VSC could realize is to hedge their remaining amount by buying euro future contracts. The company has to decide if they want to buy their future contracts either in December or September. Since this contract is standardized, we think that it is better to buy their futures in
We think that the real mark up is 12% - 0.35 %= 11.65% since the “performance bond would cost 0.35 percent of the contract,” and VSC was planning on a “modest markup of 12 percent.”
4) Some of the hedging alternatives for Vanguard Security Corporation are the following ones:
1) Forward Currency contract:
Vanguard Security Corporation could arrange with its bank a forward contract on a stated date in the future. This is a non-standardized hedging option that it could be used as an advantage for the company because the remaining amount of dollars could be hedge on November 17th. The six-month forward rate is US $1.4650 = 1 €, and the remaining amount is a total of US $144.927 mil. VSC would get: $144.927mil/1.4650 = €98,926,279.86
2) Foreign Currency Future Contract:
Another type of hedging that VSC could realize is to hedge their remaining amount by buying euro future contracts. The company has to decide if they want to buy their future contracts either in December or September. Since this contract is standardized, we think that it is better to buy their futures in