Blue Sea Cars

BSB 7302 International Finance

Fatima Mohammed 201000393Marwa Malik 201000472Mohammed Haji 201100040

Introduction

Hedging Strategy

Outlook Research

Evaluation

Suggestions & Conclusion

Presentation Overview

Understand the position and status of Blue Sea Cars Privet Ltd

How to use certain methods to recover the operating income and sales of the company

How to increase the income and sales of the company

Introduction

Hedging StrategyAvoid risk of appreciation or depreciation of currencies exchange rates

•OptionsCall Option

- Right, not obligation- European: exercised at maturity date- American: exercised at before or at maturity date- Unlimited profit / Limited risk (PREMIUM)- Eg. If a currency pair increases, the value of the call

option increases, therefore the buy of the call option can buy the option at the lower price and sell it at the higher price.

• Forward Contract

- Buying at today’s exchange rate at an agreed future date

- Reduces risk of future payment because of fluctuations

- Tool used for hedging systematic outflows

Hedging Strategy (cont’d)

Payments: 1: October 30th, 2014: “EUR/USD”

- Purchase a call option on September 1st, 2014 (lower than forward)

- Invest the option cost in 2 month USD LIBOR

- On 30th of October, we’ll receive principle plus interest

- Exercise the option because spot is higher than strike to get the required EUR to pay the obligation

Hedging Strategy (cont’d)

2: November 11th, 2014: “USD/JPY”

- Purchase “Forward Contract” on September 1st, 2014

- Invest the equivalent amount of JPY payment in USD LIBOR for 71 days

- On November 11th, 2014, we will receive the principle invested plus the interest income

- Convert the USD to JPY using the forward rate and pay the obligation

Hedging Strategy (cont’d)

3: December 12th, 2014: “GBP/USD”

- Purchasing a call option on September 1st, 2014

- Invest the option cost in 102 days USD LIBOR

- On 12th of December, we’ll receive principle plus interest

- Exercise the option because spot is higher than strike to get the required GBP to pay the obligation

Hedging Strategy (cont’d)

4: December 25th, 2014: “USD/JPY”

- Purchase “Forward Contract” on September 1st, 2014

- Invest the equivalent amount of JPY payment in USD LIBOR for 114 days

- On December 24th, 2014, we will receive the principle invested plus the interest income

- Convert the USD to JPY using the forward rate and pay the obligation

Hedging Strategy (cont’d)

RECEIVABLE AMOUNT:- Amount in KWD on December 31st, 2014,

amount will be hedged by forward contract

REMAINING AMOUNT:- Invest in 3 month time deposit and 1 month LIBOR

Hedging Strategy (cont’d)

Outlook and Research1)The GBP movement

2) The Euro Movement:

3) The KWD movement

4) The JPY movement

5) The USD movement

Factors that affect currencies’ value:

1) Trade balance:

2) Economic health

3) Interest Rates / Inflation:

4) Politics

5) Characteristics of major currencies:

A)Tracking historic movements to predict future movement

B) Technical Analysis

Date Currency Amount Amount In USD Position Hedging ToolCash available in bank USD $7,750,000.00

30 October 2014 EUR EUR 465,000 USD 564,975.00 OutFlow Call Option11 November 2014 JPY JPY 1,500,000 USD 14,389.18 OutFlow Forward Contract12 December 2014 GBP GBP 900,000 USD 1,390,500.00 OutFlow Call Option 25 December 2014 JPY JPY 11,000,000 USD 1,678.74 OutFlow Forward Contract31 December 2014 KWD KWD 175,000 USD 614,682.12 Inflow Forward Contract

Evaluation The table represents the payment dates the amount of payments in foreign currency and the equivalent of them in USD.

Hedging 30 October 2014 EUR/USD

Hedging Strategies

Spot Market

Payment Amount Spot Rate On 28-OCT Amount Required on OCT 30 by $

EUR 465,000.00 1.2734 USD 592,131.00

Forward Market

Payment Amount Forward Rate Amount Required on OCT 30 by $

EUR 465,000.00 1.3137 USD 610,870.50

Options

Option Type Payment Amount Prior Settle Strike Spot Market Price On Sep 1

Call Option EUR 465,000.00 0.0241 1.215 1.3128Option Cost USD 14,711.89

Exercise the Option USD 564,975.00 Total Cost USD 579,686.89

Investing Strategies

Money Market

Time Period Payment Amount USD Interest Rate EUR Interest Rate

60 Days USD 564,789.80 0.19675% 0.09714%Option Payment USD 564,975.00

Hedging 11 November 2014 USD/JPY

Hedging Strategies

Spot Market

Payment Amount Spot Rate On 7-Nov Amount Required on NOV 11 by $

JPY 1,500,000.00 114.54 USD 13,095.86

Forward Market

Payment Amount Forward Rate Amount Required on NOV 11 by $

JPY 1,500,000.00 104.245 USD 14,389.18

Investing Strategies

Money Market Time Period Payment Amount USD Interest Rate JPY Interest Rate

71 Days JPY 1,500,000.00 0.197% 0.32643%

Lend to the Market USD 14,384.46

USD 14,389.18

Transfer amount to JPY on Forward JPY 1,500,000.00

Hedging 12 December 2014 GBP/USD

Hedging Strategies

Spot Market

Payment Amount Spot Rate Outlook in Dec Amount Required on DEC 12 by $

GBP 900,000.00 1.63 USD 1,467,000.00

Forward Market

Payment Amount Forward Rate Amount Required on DEC 12 by $

GBP 900,000.00 1.6615 USD 1,495,350.00

Options

Option Type Payment Amount Prior Settle StrikeSpot

Market Price On

Sep 1Call Option GBP 900,000.00 0.0259 1.545 1.6607Option Cost USD 38,710.92

Exercise the Option USD 1,390,500.00 Total Cost USD 1,429,210.92

Investing Strategies

Money Market Time Period Payment Amount USD Interest Rate GBP Interest Rate

102 Days GBP 900,000.00 0.23360% 1.05400%Equivalent amount of payment on

USD USD 1,389,699.53

Principle + Interest USD 1,390,500.00

Hedging 25 December 2014 USD/JPY

Hedging Strategies

Spot Market

Payment Amount Spot Rate Outlook in Dec Amount Required on DEC 25 by $

JPY 175,000.00 109 USD 1,605.50

Forward Market

Payment Amount Forward Rate Amount Required on OCT 30 by $

JPY 175,000.00 104.245 USD 1,678.74

Investing Strategies

Money Market Time Period Payment Amount USD Interest Rate JPY Interest Rate

114 Days JPY 175,000.00 0.23360% 0.32643%

Equivalent amount of payment on USD USD 1,677.76

Principle + Interest USD 1,678.74

Transfer amount to JPY on Forward JPY 175,000.00

Inflow

Hedging 31 December 2014 USD/KWD

Hedging Strategies

Forward Market

Received Amount Forward Rate Amount on Dec 31 in $

KWD 175,000.00 0.2847 USD 614,682.12

Investing the Remaining

Cash available in bank $7,750,000.00Total Outflow USD 2,024,965.73

Remaining USD 5,725,034

Time Deposit 3 MonthsAmount Invested in Time Deposit USD 5,725,034.27

Rate 10%Bank CBZ BANK

Monday, September 01, 2014 Enter 3 months time deposit Time Deposit USD 5,725,034.27Monday, December 01, 2014 Receive the principle and interest USD 6,297,537.70

Profit USD 572,503.43

Monday, December 01, 2014Cash available in bank USD 6,297,537.70

Time Deposit 1 MonthsAmount Invested in Time Deposit USD 6,297,537.70

Rate 0.15550%

Monday, December 01, 2014 Enter 1 month USD LIBOR USD 6,297,537.70Wednesday, December 31, 2014 Receive the principle and interest USD 6,298,353.76

Profit USD 816.06

The balance at bank on December 31 2014Receive the principle and interest USD 6,298,353.76

Inflow on December 31 2014 USD 614,682.12

Total amount on Bank on December 31 2014 USD 6,913,035.88