Assessment Task: Currency Hedging Strategies and Value at Risk Calculation

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A British company just signed a contract with an American company. The contract states that the American company will purchase 10,000 units of the British company’s product at the price of $2000 per unit, with payment due in one month. The current weighted average cost of capital of the British company is 8%.

Please compute value at risk of the account receivable using both Variance-Covariance and Historical Simulation method. Please interpret your results. Please refer to literature sources and critique each method.

Please form three hedging strategies using the following financial instruments/ markets and demonstrate the relationship between the payoff and profit of each hedging strategy and the future spot exchange rate in one month’s time on a chart.

Currency forwards

Money market

Currency options

Please discuss the costs and the benefits associated with each hedging strategy, including speculation (i.e., no hedge).

Which hedging strategy (including speculation) would you recommend? Please refer to literature sources and provide reasons for your recommendation.

Format and Presentation

Font, Font Size and Spacing  The recommended font is Times New Roman and the recommended font-size is 12. Choose 1.5 line spacing.

Tables, Figures and Equations Tables and figures shall be numbered consecutively throughout the assignment. For example, Table 1, Table 2, Figure 1, Figure 2 etc.

Equations should be numbered and numbers should be in round brackets at the right hand side of the page and be ordered consecutively throughout the assignment.

·Value at risk computation and interpretation (30%)

·Critique of value at risk methods (15%)

·Hedging strategy formation and outcome demonstration (20%)

·Discussion of the costs and the benefits associated with each hedging strategy, including speculation (10%)

·Hedging strategy recommendation (15%)

·Presentation and communication (10%)

·A reasonable attempt. I could have developed some of the sections further.  

·A good attempt, displaying my understanding and learning, with  analysis in some parts.

·A very good attempt.  The work demonstrates my clear  understanding of the learning supported by relevant literature and scholarly work with good analysis and evaluation.

·An excellent attempt, with clear application of literature and scholarly work, demonstrating  significant analysis and evaluation.