Post on 07-Jul-2018
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Garg Brothers & Co. Case
MANAGING FOREIGN
EXCHANGE RISK USING
DERIVATIVES
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• Garg Brothers & Co., a 25 year oldcompany
• Handicrafts exporter• Annual Prots ! "s. 25cr
• Gross #argin $ %'
•
(et #argin $ 25'• Payment to suppliers $ on deli)ery *
Client pays on +th day
ABOUT THE COMPANY
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• xpansion plans to export other asianhandicrafts li-e chinese and middle
eastern ones• or the same /2 cr to 0e spent on
ad)ertising in europe 1 5cr surplus, 5crexpected payments, 2cr loans
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• Payments amounting to 5cr expected
• "s34 falls to 2.65 from 5.5 at time of
deli)ery• ie a loss of almost 2 lacs
• "s34 expected to 0e 5+.5 on +th day from
deli)ery• An-it to fall short in the ad)ertising
0udget
SITUATION
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• A hedge is an in)estment to reduce theris- of ad)erse price mo)ements in an
asset. (ormally, a hedge consists ofta-ing an o7setting position in a relatedsecurity, such as a futures contract.
• 9here is a ris-!re:ard tradeo7 inherentin hedging* :hile it reduces potentialris-, it also chips a:ay at potential gains.
HEDGING
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;pot "ate $ "s 2.6534
+ day :d "ate $ "s .534
+ day Call at "s .534, premium"s .5
+ day Put at "s. .534, Premium"s ./
DERIVATIVES DATA
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An-it should denitely go in to hedge hispositions to account for the depreciating
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Boo-ing "ate ";34 5.5
Amount >5?.?
xpected Amount @(" 5
Prot3 oss 1at 25'margin
1250000
0
Prot3oss at "s 5+.534 7919847
Prot3oss at "s 34 801527
CASE 1! NO HEDGE
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5?.6? 6>,>5?.?
xpected Amount @(" 5,,, %,/,?>,2
Prot3 oss 1at 25' margin 1"25"00"000 8#"8"20#
Prot3oss at "s 5+.534 79"19"847$ 8#"8"20#
Prot3oss at "s 34 8"01"52#$7 8#"8"20#
CASE 2! FUTURES HEDGE
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5?.6? 6>>5?.?
Premium 6>>5.??
xpected Amount @(" 5 %/?6
Prot3 oss 1at 25' margin 1"25"00"000 8#"0#"870
Prot3oss at "s 5+.534 7919847$ 8#"0#"870
Prot3oss at "s 34 8"01"52#$7 8#"0#"870
CASE ! PUT HEDGE
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5?.6? 6>>5?.?
Premium //%5>.?
xpected Amount @(" 5 %?62
Prot3 oss 1at 25' margin 12500000 85#8702
Prot3oss at "s 5+.534 7919847$ 85#8702
Prot3oss at "s 34 80152#$7 85#8702
CASE 4! OPTIONS STRATEGY
1
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5?.6? 6>,>5?.?
Premium /,/%,5%
xpected Amount @(" 5,,, %,%5,?,62
Prot3 oss 1at 25' margin 1"25"00"000 70"#8"702
Prot3oss at "s 5+.534 79"19"847$1"70"#8"70
2
Prot3oss at "s 34 80152#$7
1"20"#8"70
2
CASE 5! OPTIONS STRATEGY
2