Dozier: Foreign Exchange Market and Forward Contract

Dozier Industries has triple options to choose from when deciding on the exceed way to handle their early non-US buck denominated receivable 1. Entering into a foregoing contract in which Dozier would sell send on British attachs. 2. Execute a crack market transaction to create a synthetic foregoing hedgerow. 3. Do non hedge against any fluctuations mingled with the wash up and the Dollar. For the purpose of the abridgment, there are several(prenominal) assumptions made which are pertinent to the analysis that follows (see appendix). Forward Contract HedgeThe first option in stock(predicate) to Dozier Management to hedge the risk of the Great British Pound (GBP) depreciating against the United States Dollar (USD) is to commemo yard into a contract to sell ship ? 1,057,500 for USD in 90 days. Therefore, on April 14th, when Dozier receives the remain GBP from the security system contract, it would be requisite to deliver these GBP to the counterparty of the former contract. This option would solve the unfluctuating immune to any fluctuations in the value of GBP relative to USD everywhere the succeeding(a) 90 days as the unfaltering would lock in the USD/GBP exchange rate for their receivable of ? ,057,500. At the contemporary 3- month send rates of (1. 4198 USD/GBP), Dozier would capture guaranteed tax return of $1,501,438. 50. Dozier to a fault received ? 117,500 as put forward for the contract. The sloshed could sell this gear up on the decimal point foreign exchange market at the online rate of 1. 437 USD/GBP and receive $168,847. 50. investiture the proceeds of the deposit in a U. S. money market account would buffer $171,988. 00 in 90 days. It is important to respect that since the contract was settled on celestial latitude 3rd, the GBP depreciated by over 3% (from (1. 820 to 1. 437 USD/GBP). As a result of this movement, the USD value of the deposit was reduced by the same 3% from $174,135. 00 to $168,847. 50. Under the strategy of using the forward contract hedge, the firm would be informed of receiving a ingrained of $1,673,426. 50 ($1,501,438. 50 incontrovertible $171,988. 00). disposed(p) the total embody of the project of $1,642,783, the firm would realize a arrive at of $30,643. 50, a margin of 1. 87%. This profit margin would be significantly below the projected 6% return. speck grocery store HedgeAn alternative to the forward contract hedge is Dozier could create a matching liability for the GBP receivable by geting GBP from the bank, at present exchanging the GBP for USD in the discern foreign exchange market and indeed(prenominal) investing the USD proceeds in a trio month deposit. At the cartridge holder the receivable comes due, Dozier would use the GBP proceeds to rejoin the liability and keep the USD amount of the three month profit. These series of transactions would draw the risk of the derogation of the Pound. GBP funding is useable at a rate of 15% (13. 50% GBP prime rate plus 150 basis point impute spread).To create a GBP liability of ? 1,057,500 GBP in 90 days, the firm would need to borrow its present value of ? 1,021,188. 50. The firm would then receive $1,467,447. 88 at the current exchange rate. As the USD investment would be over $1. 0 million it would be classified as a bighearted deposit and qualify for the premium busy rate. As in the previous scenario, Dozier would immediately exchange the ? 117,500 deposit into $168,847. 50. The total proceeds of $1,636,295. 38 could then be invested in a deposit bearing 8%, earning use up of $31,787. 57 over 90 days. The firm would receive a total of $1,668,082. 4 from the sign deposit, the principle and interest in the three month investment. Given the project costs stated above, the firm would realize a profit of $25,299. 94, representing a margin of 1. 54%. Spot market place Hedge The final option available to Dozier Management is to leave the 1,057,500 GBP receivable un-hedged. If th e GBP were to think against the USD over the next 90 days, Dozier would pull the full benefit of this appreciation. Conversely, should the GBP depreciate versus the USD over the next 90 days, Dozier would suffer a loss equal to the portion depreciation of the pound to the dollar.In a scenario where the USD/gross domestic product exchange rate moves by 10%, the Doziers profits would range between negative $96,471. 13 (or 5. 9% of cost, qualification the project a loss) and $207,819. 16 (or 12. 65% of cost, effectively doubling the profit margin). determination Dozier can capture a profit through both of the hedging strategies albeit it macrocosm smaller than the target six percent originally built into the bid. An un-hedged position is unsufferable due to the firms late(a) financial difficulties it is critical that Dozier profits from this initial venture into this new market.While departure the receivable un-hedged alternative does offer the superior potential profit at th e current prevailing FX rates, these profits are non guaranteed (see appendix for profit/loss possibilities minded(p) GBP/USD FX fluctuations). Given the importance of locking in a profit and the uncertainty of the GBP/USD in store(predicate) exchange rates, we recommend Dozier hedges the ? 1,057,500 receivable by exchange rate in vermiform process Assumptions whole transactions are execute immediately. All transaction costs environ the forward contract are negligible. All rates given in confront 4 will not undulate over the 90 day cartridge clip span. Deposits over $1 million are eligible for the three month deposit rate. Calculation of put ons Spot Market Hedge Deposit Amount $ 168,847. 50 Interest Received $ 28,507. 45 important Amount $ 1,467,447. 88 Total $ 1,664,802. 82 approach of Project $ 1,642,783. 00 Interest on sign Deposit $ 3,280. 12 mesh bread on Project $ 25,299. 95 winnings mete on Project1. 54% Currency Forward Hedge receivable GBP $ 1,057,500. 00 Short GBP $ (1,057,500. 00) Long USD 3 month Fwd $ 1,501,438. 50 Deposit $ 168,847. 50 Cost of Project $ 1,642,783. 00Interest on Initial Deposit $ 3,140. 50 Net Profit on Project $ 30,643. 50 Profit Margin on Project1. 87% Profit Margin Scenario Analysis FX Rates% ChgUSD EquivalentCost of ProjectDepositProfit/LossProfit Margin 1. 30 -10. 0% $ 1,374,323. 87 $ 1,642,783. 00 $171,988. 00 $ (96,471. 13)-5. 87% 1. 31 -9. 0% $ 1,388,205. 93 $ 1,642,783. 00 $ 171,988. 00 $ (82,589. 07)-5. 03% 1. 33 -8. 0% $ 1,402,228. 21 $ 1,642,783. 00 $ 171,988. 00 $ (68,566. 79)-4. 17% 1. 34 -7. 0% $ 1,416,392. 13 $ 1,642,783. 00 $ 171,988. 0 $ (54,402. 87)-3. 31% 1. 35 -6. 0% $ 1,430,699. 13 $ 1,642,783. 00 $ 171,988. 00 $ (40,095. 88)-2. 44% 1. 37 -5. 0% $ 1,445,150. 63 $ 1,642,783. 00 $ 171,988. 00 $ (25,644. 37)-1. 56% 1. 38 -4. 0% $ 1,459,748. 11 $ 1,642,783. 00 $ 171,988. 00 $ (11,046. 89)-0. 67% 1. 39 -3. 0% $ 1,474,493. 04 $ 1,642,783. 00 $ 171,988. 00 $ 3,698. 04 0. 23% 1. 41 -2. 0% $ 1,489,3 86. 91 $ 1,642,783. 00 $ 171,988. 00 $ 18,591. 91 1. 13% 1. 42 -1. 0% $ 1,504,431. 23 $ 1,642,783. 00 $ 171,988. 00 $ 33,636. 2 2. 05% 1. 44 0. 0% $ 1,519,627. 50 $ 1,642,783. 00 $ 171,988. 00 $ 48,832. 50 2. 97% 1. 45 1. 0% $ 1,534,823. 78 $ 1,642,783. 00 $ 171,988. 00 $ 64,028. 77 3. 90% 1. 47 2. 0% $ 1,550,172. 01 $ 1,642,783. 00 $ 171,988. 00 $ 79,377. 01 4. 83% 1. 48 3. 0% $ 1,565,673. 73 $ 1,642,783. 00 $ 171,988. 00 $ 94,878. 73 5. 78% 1. 50 4. 0% $ 1,581,330. 47 $ 1,642,783. 00 $ 171,988. 00 $ 110,535. 47 6. 73% 1. 51 5. 0% $ 1,597,143. 77 $ 1,642,783. 00 $ 171,988. 00 $ 126,348. 77 7. 69% 1. 3 6. 0% $ 1,613,115. 21 $ 1,642,783. 00 $ 171,988. 00 $ 142,320. 21 8. 66% 1. 54 7. 0% $ 1,629,246. 36 $ 1,642,783. 00 $ 171,988. 00 $ 158,451. 36 9. 65% 1. 56 8. 0% $ 1,645,538. 83 $ 1,642,783. 00 $ 171,988. 00 $ 174,743. 83 10. 64% 1. 57 9. 0% $ 1,661,994. 22 $ 1,642,783. 00 $ 171,988. 00 $ 191,199. 22 11. 64% 1. 59 10. 0% $ 1,678,614. 16 $ 1,642,783. 00 $ 171,988. 00 $ 207,819. 16 12 . 65% Notes *All numbers round to the nearest one-hundredth decimal place. *No probability weighting given to separately scenario.