International Finance Powerpoint Presentation
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international_finance-sample_presentation.pptxNew Horizons Logistics
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What does NHL do?
Operating 150 Trucks through United States (North and East) and Canada.
NHL has 15 services centers (trucks maintenance) 11 in USA and 4 in Canada.
NHL needs annually about 1,020,000 Gallon of gasoline (average 6,800 gallon per truck).
NHL Holds stocks in Germany worth Euro 300,000, and they will sell it to support their expansion plan.
What is the NHL expanding plan?
NHL plans to spend more money in capital expenditure and increase trucks number to 200 and services centers to 23 and do agreements with external services centers to cover all United States .
The additional 50 Trucks will be imported from Germany and delivered at the end of June 2016, the manufacturer will be Mercedes Benz.
Each Truck will be handled at 120,000 Euro. Total due at the end of June 2016 is 6 million Euro.
NHL needs to buy spare parts for its new Trucks 3000 Euro per truck (150,000) Euro.
The average cost for Each services center included land and equipment's is $ 300,000 , total cost for 8 centers is 2.4 million Dollar.
NHL expenses and capital Expenditure from May to 31 July16
NHL Hedging Needs
NHL needs to hedge the following financial activities:
Buying its needs from gasoline for next 3 Months (May-June-July)255,000 Gallon (85,000 Gallon per months)..
NHL wants to sell its stock in Germany in the coming 6 months but the exchange rate should be taken in the consideration.
Borrowing Money to finance 60% of the transaction costs of buying the new Trucks and spare parts from The Germany. (This amount will be paid to Mercedes Benz dealer in USA).
Hedging the rest of payment 40% which will paid directly to Mercedes Benz in Germany.
Borrowing money to finance 100% of establishing cost of the new services centers.
investing their profits effectively.
NHL Hedging Strategies
1 - Using Futures for hedging against Fuel prices volatilities.
2 - Determining the exposure b to the exchange risk.
3 - Using currency SWAP for hedging borrowed money in Germany (60%) of the cost.
4 - Using Options (call options in this case) for hedging the rest of trucks and spare parts costs (40%) which will be financed by the company.
5 - Using interest rates SWAP for hedging borrowing money in the USA (Financing Services centers).
6 - Investing profits in Canadian Dollar.
Strategy 1 :Using Futures for hedging against Fuel prices volatilities.
Gasoline futures are traded in lot sizes of 42000 gallons per contract.
Initial margin is $ 9,450 per contract.
The maintenance Margin for June/2016 is $ 4,450 per contract.
The Number of contracts should traded per month: the monthly need is 85,000 gallons and each contracts is 42,000 gallons 42,000 * 2 = 84,000 gallons (that means we need 2 contracts per month which is the nearest amount to the actual consumption per month).
The initial cash Flow: 2 contracts * $ 9,450 (initial margin)*3Months = $ 56,700 (THE REQUIRED AMOUNT FOR STARTING NEW POSITION).
Future Quotes (May-Jun-July) 2016
Scenario One : Prices Appreciated
The Spot Future Prices for May – Jun – July are 1.5351, 1.5530, 1.5561 respectively.
Future Contracts are closed at the following prices:
May 1.5451 June 1.5730 July 1.5662
Futures (May) = 84,000 * (1.5451 – 1.5351 ) = $ 840
Futures (Jun) = 84,000 * (1.5730 – 1.5530 ) = $ 1680
Futures (July) = 84,000 * (1.5662 – 1.5561 ) = $ 848
The total profit from taking a long position is $ 3368.4
Scenario One : Prices Depreciated
The Spot Future Prices for May – Jun – July are 1.5351, 1.5530, 1.5561 respectively.
Future Contracts are closed at the following prices:
May 1.5251 June 1.5421 July 1.5382
Futures (May) = 84,000 * (1.5251 – 1.5351 ) = - $ 840
Futures (Jun) = 84,000 * (1.5421 – 1.5530 ) = - $ 916
Futures (July) = 84,000 * (1.5382 – 1.5561 ) = - $ 1504
The total profit from taking a short position is $ 3260.
Strategy 2: Determining the exposure b to the exchange risk.
There is probability 45% that German economy will improve in the next 6 months and the exchange rate will be $ 1.4/Euro. The stock will be worth Euro 300,000
There is probability 55% that German economy will slow down and the exchange rate will be $ 1.2/Euro. The stock will be worth Euro 260,000.
NHL wants to determine the exposure b to the exchange risk.
Strategy 2: Determining the exposure b to the exchange risk. (calculations).
E(P) = (.45)(1.4*Euro 300,000)+(.55)(1.2* Euro 260,000) = $ 360,600
E(S) = (.45)(1.4)+(.55)(1.2) = $1.29
Var(S) = (.45)(1.40-1.29)^2 + (.55)(1.2-1.29)^2 = .00990
Cov(P,S) = (.45)(420,000-360,600)(1.4-1.29)+(.55)(312,000-360,600)(1.2-1.29) = 5,346
b = Cov(P,S)/Var(S) = 5346/.00990 =Euro 540,000 .
Strategy 2: Determining Beta.
Beta = Euro 540,000 that means NHL can hedge this exposure by selling Euro 540,000 forward.
By doing that, NHL can eliminate the volatility of the dollar value of the German Stocks which are due to the exchange rate volatility.
Strategy3: Option Strategy
NHL imports trucks and parts from contractors in Euro
The company decides to purchase options on Euros to exercise if they are “in the money” to capitalize on gains .
NHL has a strong belief that the currency will increase, they will also hedge by writing (“Seller”) puts on Euro.
NHL will purchase only using plain vanilla currency options.
Call Option Scenario
NHL purchase June call option on Euro with strike price of 1.13½ ($1.1350/Euro), and a premium of $0.005/EURO
At all spot rates below the strike price of 1.135, the purchase of the option would choose not to exercise because it would be cheaper to purchase Euro on the open market
At all spot rates above the strike price, NHL will exercise the option, purchase Euro at the lower rate (strike price) to use for company purchases .
+ 1.00
+ 0.50
0
- 0.50
- 1.00
1.125
1.130
1.140
1.14.5
1.135
Limited loss
Unlimited profit
Break-even price
Spot price
(US/Euro)
“Out of the money”
“In the money”
Strike price
Profit loss for call option on Euro
Writer Of Put
Using the same scenario, if the spot price of Euro drops below $1.135 per Euro, the option will be exercised
Below a price of $1.135 per Euro, NHL will lose more than the premium received from writing the option (falling below break-even)
If the spot price is above $1.135/Euro, the option will not be exercised and NHL will recognize a gain from the premium
+ 1.00
+ 0.50
0
- 0.50
- 1.00
57.5
58.0
59.0
59.5
58.5
Unlimited loss
up to 58.0
Limited profit
Spot price
(US cents/SF)
Break-even
price
NHL as writer of put
Strike price
Call Option Hedging
NHL needs 3,000,000 for capital expenditures in 1 year. To hedge the payable due NHL purchased call options at the strike price of $1.135/euro with the premium of $.005 per Euro. The U.S interest rate is 3 % per annum.
At maturity considering time value of money it would cost NHL $15,000 (.005*3000000*1.135)
If the Euro appreciates against the dollar at the strike price NHL would purchase a total 3,000,000 Euro for $3,405,000
The maximum amount NHL will spend for the currency needed is $3,415,000 (3,405,000+15,000)
Hedging Strategy 4: Currency Swap
Basic Overview:
In a currency swap, one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counterparty, which are denominated in another currency.
Two Main Reasons for Currency Swap:
1: To obtain debt financing in the swapped currency at an interest cost reduction.
2: Benefit of hedging long-run exchange rate exposure.
Hedging Strategy: Currency Swap
New Horizon Logistics needs to hedge 60% of Truck and Parts.
Cost of Project is € 3,600,000 plus € 90,000 in parts.
Current exchange rate is $1.14/€.
Cost of Project in USD equals to $4206,600.
The Project has economic life of five years.
NHL can raise $4,206,600 by issuing five-year bonds at 3%.
NHL is not well known in Europe, and will have difficulty borrowing at favorable rate of interest.
Currency Swap
Assume German MNC has mirror-image financing need and has U.S. subsidiary need of $4,206,600 and could raise 3,690,000 Euros at 1%.
NHL by using Swap can obtain enough Euros on more favorable rate of interest.
There is a cost savings for each counterparty because of their relative comparative advantage in their respective national capital markets.
German MNC
Currency SWAP
New Horizon Logistics will receive from Swap Bank €3,690,000.
German MCN receives $4,206,600.
After 5 years Currency Swap is terminated and NHL will pay €3,690,000 and German MCN will pay off $4,206,600.
The Swap locks in foreign exchange rates for each party to meet its debt service obligations over the swap existence.
In general, the borrower prefers the certainty of the swap, regardless of the equivalency.
Strategy 5: Interest Rate Swap
Purpose:
A liquid derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another.
Exchange interest rate payments on an agreed notional amount for an agreed period of time.
May be used to hedge against adverse interest rate movements of to achieve desired balance between fixed and variable rate debt
Both parties end of benefiting by obtaining better borrowing rates than they offered by a bank
Interest Rate Parity
Interest rate parity is a no arbitrage condition representing an equilibrium states under which investors will be indifferent to interest rates available on bank deposits in two countries
Borrow an amount in a currency with a lower interest rate
Convert the borrowed amount into a a currency with a higher interest rate
Invest the proceeds in an interest-bearing instrument in this (higher interest rate) currency
Simultaneously hedge exchange risk by buying forward contract to convert the investment proceeds into the first (lower interest rate) currency
Covered Interest Rate Arbitrage
Assume that the interest rate for borrowing funds for a one year period in the United States is 3% per annum, and that the one year deposit rate in Germany is 5%
NHL Borrows in UDS at 3%
Converts borrowed amount into Euro at the spot rate
Invests these proceeds in a deposit denominated in Euro’s and paying 5% per annum
NHL can use the one year forward rate to eliminate the exchange rate implicit in this transaction which arises because NHL is now holding the EURO, but has to repay the funds borrowed in USD. Under covered interest rate parity, the one year forward rate should be approximately equal lets say 1.0194 (USD= 1.0194 EURO)
Continued – interest rate parity
What is the one year forward is also at parity. In this case NHL in the last scenario could reap riskless profits of 2%.
NHL borrows 2.4 million USD at 3% for one year
NHL immediately converts the borrowed proceeds to EURO at the spot rate
Places the entire amount in a one-year deposit at 5%
NHL enters into a one year forward contract for the purchase of $2,472,000 (2,400,000+ ( 2,400,000*.03)).
After one year, NHL received 2,520,000 of Euros, of which 2,474,000 is used to purchase USD under the forward contract and repay the borrowed amount, leaving NHL in the pocket the balance of 46,000 worth of Euros
Strategy 6: Investing The Profits
The Canadian profits that were made for the month of April totaled $1 million Canadian dollars.
Looking at the past 10 years, the Canadian dollar is at a low point, however it has appreciated against the USD in the past 3 months. This trend is expected to continue.
Investing The Profits
Current exchange rates = 1.2658 CAD/ 1 USD
3 Mo interest rate CAD = .54%
3 Mo interest rate USD = .29%
3 Mo forward rate CAD/USD = 1.2657 CAD/ 1 USD
https://research.stlouisfed.org/fred2/series/TB3MS
http://www.investing.com/currencies/usd-cad-forward-rates
http://www.bankofcanada.ca/rates/interest-rates/
http://www.xe.com/currencycharts/?from=CAD&to=USD&view=5Y
Investing The Profits
Possible investing scenarios
Convert $1 mil to USD and invest 3 months in US
$1,000,000 CAD/ 1.2658 = 790,014.22 USD
790,014.22 USD X 1.0029 = $792,305.261 USD = PROFIT $2,291.04 USD
Invest in Canada for 3 months and sell CAD forward, then convert to USD
$1,000,000 CAD X 1.0054 = $1,005,400 CAD
$1,005,400 CAD/ 1.2657 = $794,343.051 USD = PROFIT $4,328.83 USD
BETTER OPTION
Thank You
And see you in the commencement !!
ExpenditureTotal The Spot Price and CostTotal
Gasoline (May-June -July)Expenses2550001.53390,150$
TrucksCapital Expenditure50120,000€ 6,000,000€
Spar PartsExpenses503,000€ 150,000€
Services CentersCapital Expenditure8300,000.00$ 2,400,000$
Exchange rate Dollar/Euro1.262
Total Cost in Dollar10,551,450.00$
NHL expenses and capital Expenditure
CalculationsEconomy (Growth)Economy(slow down)
Prpbability45%55%
Assets Value300,000€ 260,000€
Exchange rate $/Euro1.41.2
E(p)360,600.00$
E(s)1.29$
Var (s)0.00990
Cov (P,S)5,346.000
B=Cov (p,s) / Var (s)
540,000.00€
