BAHRAIN POLYTECHNIC

Blue Sea Cars

BSB 7302 International Finance
Group Assessment
Marwa Malik
Mohammed Haji
Fatima Mohammed

Assessment 1
Supervised By: Latifa AlFadhel

201000472
201100040
201000393

Contents
Executive Summary....................................................................................................................................... 3
Introduction .................................................................................................................................................. 4
Hedging Strategy ........................................................................................................................................... 5
Outlook and Research ................................................................................................................................... 7
Evaluation ................................................................................................................................................... 17
Suggestions ................................................................................................................................................. 25
Summary & conclusion .............................................................................................................................. 26
List of References ........................................................................................................................................ 27
Bibliography ................................................................................................................................................ 27
Appendix ..................................................................................................................................................... 29

Executive Summary
Blue Sea Cars is a family business that exports and imports used and new cars. The
company faced some financial issues and they were advised to enter into FX market to hedge
their position. First of all, the report will talk about the hedging strategy that was selected
based on the market study where options and forward contracts are used for FX market while
Libor and time deposit has been chosen for investment strategy. In addition, it has been
clarified how to choose a currency pair and the risks that might the investor face and to
mitigate those risks. Moreover, the report explains the currency's movements that are
mentioned and that the company will use in hedging their position. Each one of them (GBP,
EUR, KWD, JYP) has been evaluated against the USD. On the other hand, US dollar movement
has been evaluated against CAD. There are other factors that determines the currency
appreciation and depreciation that has been mentioned below in the upcoming paragraphs.
Moreover, historic movements have been clarified and technical analysis has been defined
and explained too. Then, it comes the evaluation part where all the calculations are there to
showcase the gained profits from the transactions. Finally, there are some recommended
suggestions in order to improve the investment strategy.

Introduction
This report is written in order to understand the position and status of Blue Sea Cars
Privet Ltd, and how to use certain methods in order to recover the operating income and
sales of the company. Some of the methods that are required to use in this report in order to
gain profit are the hedging strategy, planning and researching about precise currency rates
and their movements, and how they could be used to help the company succeed in raising
their income.
The main purpose of this report is to prepare and outline a proposition for the board
members of Blue Sea Cars and inform them about the plans of the future changes that will
have to occur in the operations in the company. These plans include the strategies mentioned
above, and how to apply these tools to hedge against the exchange rate risk using different
formulas and calculations. Using these calculations and methods, suggestions will be
recommended for improving the investment strategy and future operations in order to avoid
any decline in income and sales growth.

Hedging Strategy
The fluctuation in the FX exchange rate affects companies account payables and
receivables. To avoid the risk of appreciating or depreciating of currencies exchange rates,
companies usually use several hedging tools to offset their position.
The hedging tools suggest using:
Option
Call Option:
The currency call option gives the option holder the ability but not the obligation to
buy the currency during exact period of time and exact price to hedge the future payables in
the foreign currency. There are two types of options, which are European and American
options style; the difference between them is that the American option can be exercised
before or at the expiration date, but the European can only be exercised at the maturity date.
The call option is used to hedge the foreign currency outflows. When the payable currency
depreciates, the company may lose money using options protect their position. The reason of
choosing American call options is that firstly because of that the American can be exercised
before the maturity date and also offer limited risk and unlimited profit. The downside risk is
limited to only premium comparing to the losses in spot exchange.
The value of the call option rises if the currency pairs price increases. If the price of
currency pairs increases the value of call option will increase and then the investor has the
ability buy the currency pair in lower price.
Forward Contract:
The forward hedging or future hedging, is buying an XYZ amount of a foreign currency
at specified rate Forward Rate today and exchange the currency in future date agreed by
two parties. The forward contract reduces the risk involved in making a future payment
because of the fluctuation of the exchange rate between currencies. Usually the forward rate
provides the lowest cost of accounts payable with high certainty of risk level. The advantage
of using forwards is that its a tool used to hedge systemic outflows.
In this case the hedging tools are Forward Contracts and Options, there are 4
payments required to be done between October 2014 and December 2014.
- For the first payment on October 30 2014: EUR/USD
The company will hedge by purchasing a call option on September 1 2014, the reason
of choosing call options was that the cost of using call option is lower than entering a
forward contract(The comparison is in the Excel File). Then, invest the option cost in 2
month USD LIBOR. In 30-OCT the company will receive the principle invested plus the interest
income, then exercise the Call option because the spot is higher than the strike price and
get the required balance in EUR to pay the obligation.
- For the second payment of November 11 2014: USD/JPY
The hedging tool is purchasing Forward Contract on September 1 2014, and then
invests the equivalent amount of JPY payment in USD LIBOR for 71 days. On November 11

2014, the company will receive the principle invested plus the interest income, then convert
the USD to JPY using the forward contract and pay the obligation.
- For the third payment of December 12 2014: GBP/USD
The hedging tool is purchasing a call option on September 1 2014. Then invest the
option cost in 102 days USD LIBOR. In December 12 2014 the company will receive the
principle invested plus the interest income, then exercise the option if the strike price is lower
than spot rate, for this case the team conducted a research to get the outlook spot rate for
December and assume that the Call option will be exercised to get the required balance in
GBP and pay their obligation.
- For the fourth payment of December 25 2014: USD/JPY
The hedging tool is purchasing Forward Contract on September 1 2014, and then
invests the equivalent amount of JPY payment in USD LIBOR for 114 days. On December 24
2014, the company will receive the principle invested plus the interest income, then convert
the USD to JPY using the forward contract and pay the obligation.
On December 31 2014 there is a receivable amount in KWD, the team decided to
hedge it by forward contract.
The remaining balance in the bank will be invested first 3 months in time deposit,
then 1 month LIBOR.
- Choosing a currency pair
In a stock market, you pay money in exchange for a commodity. The same goes for
the foreign exchange market. You pay money to get money in another currency. In other
words, you sell an amount of money in a currency to get the same amount in another
currency. For this to happen, currency pairs were created. Lets take for example GBP/USD.
You are now paying in US dollars to receive British pounds. In each pair, the first currency is
what you receive and the second currency is what you pay.
The first currency pair chosen is the EUR/USD pair. The reason is that these two are
the strongest currencies in the world and the most liquid as well. It has a low pip/spread
percentage even though it is volatile. This pair is highly traded in the foreign exchange
market.
The second pair chosen is GBP/USD. This is also highly volatile in the market, yet they
are traded regularly. The main benefit of this currency pair is that it generates signals for
opening a position. Their pip percentage is low as well.
The third pair chosen is the USD/JPY pair. This is also another strong and major
currency in the world. It is also traded regularly and has a low pip percentage. This needs to
be traded from midnight to 8AM in GMT in order to be in the Asian session while trading.

The three pairs mentioned above are three of the most powerful and major currency
pairs in the world. These pairs were chosen because there are expected outflows in those
currencies from the current amount that we have in USD.
Another pair chosen was the KWD/USD. This is because we have an expected inflow
in cash with the Kuwaiti Dinars currency. Even though the Kuwaiti Dinars is the most
expensive currency, it is not strong and not traded regularly.

Outlook and Research

-

The GBP movement:

The above chart illustrates the movement of the GBP against the USD for the last 5
years from the 20 November 2009 till 19 November 2014 (XE Currency Charts (GBP/USD)).
GBP used to be the most powerful currency historically; it reached its peak in mid
2009. Though, it used to be the strongest among the currencies, after its peak in 2009, it
faced a major fall in its value that it never did reach within 5 years. (BRITISH POUND-US
DOLLAR Exchange Rate)
In 2008, the financial crisis caused to devalue the pound from 1.98 till it had reached
1.420 in the beginning of 2009. The fall is a consequence of the country's economic factors.

Since the Great Britain GDP fell starting from 2007 to reach -4% in 2009, their
inflation rate increased as well to reach 3.6% back in 2008. Moreover, the unemployment
rose to reach 7.7% in 2009 which is a high rate comparing it with the previous years.
Due to all the economic factors that resulted in the depreciation of the GBP value, UK
has decided to control the market and use the quantitative easing program in order to get to
know the issues that were resulted from the crisis, as well they handled to decrease the
inflation rate to 0.5% in 2008.
As showing in the above chart, the GBP value dropped the most during the economic
crisis in 2010 to reach USD 1.44 per 1 GBP. The currency kept fluctuating during the following
4 years where it rose and falls to reach its highest value at the price of 1.73 in mid of 2014. In
that period, GBP used to be considered as one of the strongest currencies. Unfortunately, it
sharply devalued to reach USD 1.55 at the end of 2014. It is believable that the GBP currency
is unstable and speculators expect that it might increase slightly in the following months. (XE
Currency Charts (GBP/USD), 2014)
-

The Euro Movement:

The historical movement of the European Euro against the US dollars for the past 5
year has been demonstrated clearly in the above chart, where it shows the movements from
20th of November 2009 till 19th November 2014.
The above chart illustrate that Euro value has been appreciated from 1.17 in 2010 to
1.47 in 2011 which means that it had appreciated by 25.6% in one year against the USD.
Since mid 2009 till the beginning of 2010, there has been a drop between Euro values
against USD by 25%. This depreciation might be the consequence of the Euro crisis in 2009,
where Greece debt reached its highest level with an amount of $442 billion.
Most of the countries opinions were not to support Greece while German prime
minister was to do so as it's the EU obligation. (NEWS, 2009).
The Debt of level of Greece rose up to 113% of its GDP which resulted in downgrading
Greek's government's debts and banks as the allowed limit is only 60%. The consequence was
that the value and the demand on the Euro both decreased.
Nevertheless, 80 billion euro has been provided by the Euro-zone members and 66.2
Billion euro from International Monetary Fund (NEWS, Eurozone approves massive Greece
bail-out, 2010). This action resulted the Euro to appreciate from USD 1.19 to USD 1.37 which
helped to increase its value; this stroke maintained the investor's trust in the Euro. The trust
did not preserve as another country of the Euro zone occurred to have high level of debts
(Ireland).
The consequence of these high level debts resulted in a decline in European Union
GDP from 4% in 2010 to 2.8% in 2011. As well, their inflation level has been affected too
where it increased by 94% to reach 4.4% within 1 year only. (Inflation, consumer prices
(annual %))
Despite the fact that the Euro value rose and fall, it maintained a good history in the
beginning of 2012. Unfortunately, it decreased from roughly from USD 1.30 in April to
USD1.20 in July. During the first months of 2013, the Euro appreciated to reach USD1.36.
These historical movements in the Euro currency is due to the European Union GDP as it's
decreased from 2.8% to 2.3% which will affect the value of the Euro. (GDP growth (annual
%)). During 2013, the Euro fluctuations were not sharp. On the other hand, by the end of
2014, it devalued from 1.37 to 1.24
The Euro value movement against the US dollars has been fluctuating over the past 5
years as its showing in the above chart. This movement in the Euro value can be the result of
several factors such as:
The relationship between European & American economies:
One of the most important factors that might affect the economy of any country is
the interest rates as when the USD value generally weakens when the United States interest
rates are lower than the European's interest rate, and vice versa where USD strengths when
its interest rates are higher than the European Union. On the other hand, when the European
Union economy boosts and start to grow rapidly, the Euro value become stronger than the
USD and vice versa.
The unstable political situation:

The Euro is considered to be a new currency as it was introduced in the market in

1999.
Since it is a new currency, the consequence will be that it will be treated as an
experiment in the monetary policies and economic. In addition, the Euro is common between
16 European countries only. Due to that, disagreements and differences might occur. If these
disagreements took a place in the market, it might affect the future stability of the Euro value
in the Euro-zone which can be seen as a hazard. As usually USD weakens the Euro. (Perry)

USD/KWD:

The figure above illustrates the Kuwaiti Dinar against the US Dollars for the past five
years. The highest point was in the beginning of 2010, which reached 0.31895 KWD per 1
USD, and its lowest point was at 0.27150 KWD per 1 USD in mid 2011.
According to SPPs rating, the Kuwaiti Dinar is the highest rated currency in the world.
Its value is more than any other currency. Their average yearly income in USD is 183.2 billion,
as indicated by the World Bank. The reason is because they mainly depend on their oil
production, as it is one of the essential resources for their income. They generate other
income by visitors of the country, their financial sector, and many other aspects. These
resources cause the basic fluctuations in the value of the Kuwaiti currency.
From 2010 to mid 2011, there was a general drop in the value of the Kuwaiti Dinar
currency, however it started to recover and was appreciating up to mid 2013. There were
some fluctuations after that up to mid 2014, but it was generally stable, followed by a steep
increase in its value against the US Dollars.

USD/JPY:

In the chart above, it is illustrated the JPY currency movement against USD for the
past 5 years. We can clearly see that the highest peak is the most recent currency value
between Japanese Yen and US Dollars, which is 117.5462 JPY per 1 USD. The lowest point is in
the mid 2011, which reached at 75.75707 JPY per 1 USD. The currency has risen at
approximately 56% since its lowest peak.
According to the World Bank, Japans average yearly income is 4.902 US Dollars. This
income consists of the high visitors of Japan per annum, their strong financial sector, and
mainly their high profiting companies such as Toyota, Sony, or Honda. These funding tools
were part of the reasons for the fluctuations in the value of the currency of Japan against US
Dollars.
The Japanese GDP Growth was fluctuating over the past 5 years (Appendix 10). Its
lowest point was at (-4%) in 2009, and its highest peak was at (2.5%) in late 2011. The GDP
was rising and falling over the past 5 years and is now at (-0.25%). Other factors that affected

the change in value of the Japanese currency were the fluctuations in the unemployment rate
and interest rates. The rise in the currencys value mainly depended on the low interest rates.
Since it was low, more countries borrowed JPY, meaning the demand grew, thus the value
increased.
There was a general decrease in the currency from 2010 to the beginning of 2012,
however, with the help of the low interest rates, the value of the JPY increased dramatically
against the US Dollars. It is now at its peak at 117.5462 JPY per 1 USD.
The USD Movement against CAD

In the last 5 years, the value of the USD fluctuated where it used to be 1.05 in the mid
of 2009. The value of USD started to fall slowly to reach its lowest price at 0.93 in 2011. The
USD tried to enhance its value & position in the market. By 2013, the value started to increase
slightly where it reached the price of 1.13 by end of 2013. The USD value reached its peak at
the price of 1.99 by end of 2014.The speculators expectations are that the USD value will
increase in the upcoming months. (XE Currency Charts (USD/CAD), 2014)
Although if the USD value fell, it might benefit the citizens where the American
products will be much cheaper and it can lead to increase the export level. On the other hand,
this might be a problem where it will cause the oil prices to increase as the oil is priced in US
dollars.

The below diagram show the USD movements against some of the most powerful
currencies such as CHF, JPY, GBP, EUR and SEK. The graph illustrates the historical movement
within the past 5 years of the USD. (United States Dollar)

After examining the market and the USD historical movement, it showed that it was
devalued in 2002 and it started to raise its value by 2011. The fluctuations that US dollar faced
was due to many reasons, one of them was their economy where the US debts increased to
reach more than 17 trillion. The consequence of the high debts in USA resulted in raising
their taxes and reducing their spending which cause the US dollars to lessen. On the other
hand, while the European Union were busy during the euro-zone crisis with helping Greece
debt issue, the demand on the Euro decreased which assisted the US dollar value to rise.
Determination of Currencies Value:
Throughout the history, there were a lot of commodities to exchange instead of
money but gold has always been the most popular commodity and it used to be considered as
a standard to measure the currency value. In the past, if a country wanted to issue the
money, they would check their gold reserve in the central bank first. For instance, if a
country's gold reserve is equivalent to $500,000, then they can generate paper money with an
amount that would be identical to the gold reserve. This method is not used any more by the
developed countries but it still has its effect on currencies value. (Amadeo, 2014)
Nowadays, currencies have their own values and their values are determined by
buying and selling the price of the currency. Moreover, the value of the currency is not the
same, where it can be appreciated, depreciated or stays the same for a period of time. As
well, the normal formula applies to currencies market as if a currency demand increases, the
value of it increase also, while if the demand declined it results in devaluing the currency. Yet,
there are other factors to determine the currency's value other than the supply & demand
theory.

Factors that affect currencies value

Trade balance:
Trade balance can be defined as the difference between the imports and exports of a
country, where trade deficit occur if the country's import outweighs its exports. However,
trade surplus happens if the opposite took a place and the exports are more than the imports.
Trade deficit can affect the value of a currency where it leads to increase it while the trade
surplus results in devaluing the currency. (McCune, 2010)
Economic Health:
Stability of the economic condition in any given country affects the value of its
currency and it control's its movement in the market. Usually, any nation with a stable, good
and constant economic situation results in raising the value of the currency and vice versa.
(Manal)
Interest Rates / Inflation:
Central Banks are the one who sets the interest rates; those rates can influence the
inflation rates as well. For instance, if a country's inflation rate is high, the interest rate
increases by the central banks in order to reduce the inflation rate. If they succeeded to do so,
the value of the currency rises. To simplify, the higher the interest rate gets, the higher the
value of a currency. (Bergen, 2010)
Politics:
Politics play a major part in setting the currency value, where some countries might
declare some new policies that related to their political position and it might affect the
currency. However, it depends on the policy itself where it can appreciate or depreciate the
value of the country's currency. For instance, involving in a war or even simple decisions like
consumer tax cuts or geopolitical events can influence the currency movement.
Characteristics of major currencies:
As mentioned above, there are many factors that can decide on the currency's value.
However, beside these factors, each currency has its own characteristics that can affect on its
value:
USD:
Nowadays, the USD currency is used by most of the central banks around the world
for their reserves and for their financial dealings. The factors that can affect the US value as
others is the political stability of the country as United States of America tend to invest and
allocate a lot of their money in military forces. Another factor that might influence US dollar
value is it's large rate of trade deficits which can directly change the weight of the USD due to
its high sensitivity from the interest rate changes.
The oil trade price and the US dollar are linked together as the oil barrels are being
traded with USD. Moreover, U.S largest share of expense goes to military and oil as its one of
the major sources for energy. For that reason, any changes that might occur in the oil price
will affect the USD. For instance, a decrease in the price of an oil barrel increases the value of
the USD and vice versa.

GBP:
Although the British Pound is recognized with its high stability when comparing it to
other currencies, there are factors that affect the value of the GBP. The economic condition in
the UK relays on the level of their consumer spending. For that reason, sales, unemployment
level, income ratios and LABOR situation are all manipulating in the GBP value. However, the
high value of the GBP is due to its high interest rates and the economic policies they are
setting. (etoro, Currency Characteristics - U.S. Dollar, Euro, Pound and Yen)
EUR:
The Euro is the official currency that the European Union's countries use. As
mentioned earlier, there are general factors that affect any currency but specific features that
are related only to that currency. Euro has that special feature that can be as a positive and
negative depending on the situation. As Euro is being utilized in the euro-zone countries, if
any of the countries faced an issue that had an impact on their economic condition, it would
affect all the European Union's countries. For instance, the high debts of Greece or the
economic recession in Spain resulted in devaluing the EUR even if other countries are doing
well such as France and Italy. (etoro, Currency Characteristics - U.S. Dollar, Euro, Pound and
Yen)
JPY: Japanese Yen have two main factors that determine its value which are the
growth rate and the trade balance. Japan is well known for its massive rate of exports which
makes it one of the leading exporters in the world. On the other hand, given that its exports
exceed their imports, the result was trade surplus which will cause the currency to devalue. In
addition, JPY main feature is its low value due to the slow growth rate. (etoro)
How do currencies move against each other?
Exchange trade is the hypothetical sphere where currency prices fluctuate and move
against each other; whereby an increase position on quote currency price correlate differently
and consequently will compose a downward on the other currency value. In other
comprehensive words, the increase on quote currency price will add more value on the base
currency. However, the trade setups in this market vary according to certain factors that
influence the commencement of them, and they are:
Differentials between inflation rates: The differences of the country's inflation rate
scale determine the value of the country's currency price. The higher the inflation rate the
lower value the currency has and vice versa.
Differentials in interest rates: the other factor that may directly influence the
ascending or descending of the country's currency value is the interest rates applicable range
whereby the higher the interest rate the higher the currency value and vise versa.
Political stability: this aspect tends to indicate the economical overview of any
country which nominally reflects on their investment progress/growth and inferences
dynamically. The more instable the country in regard of this regard, the preferences and
priorities of domestic and foreign investors will vary and tend to choose other countries with
a more stable that has more opportunities to principally be part of. Consequently, this will

somehow contribute to determine the value of the countries' currencies depending on the
demand and supply margin.
Tracking historic movements to predict future movement:
It is almost impossible to use the data comprised from changes in the historical
movements to predict future movements, however there are some tools developed in order
to predict expectations that are nearly accurate of the future movements. The main tool used
to predict future movements is the use of the technical analysis, which includes many charts
such as line chart, candlestick chart, renko chart, and many others.
Bloomberg has a range of tool they use to use the method of tracking historical
movements of currencies to predict the near accurate future movements. These tools include
determining the strength of the economy, their inflation rates, and their interest rates. These
tools are used in order to get a better idea of what the currency rates would be in the future
for buying and selling currency rates.
Technical Analysis
This analysis is used to predict the near accurate value of a currency in the future
using the historical movements of the currency. This will help the investor by choosing their
position, either long or short. For example, if the value of a currency is increasing against
another currency, the investor will choose the long position. Although it is almost impossible
to know the exact future value of the currency, the technical analysis can be nearly accurate.
The main benefit of this tool is to help investors make the decision in order to buy or
sell currencies to generate profit. By knowing the estimated future value of the currency
judging by the historical movements, one can benefit by trading currencies with the future
amount. However, some economists do not take this tool under consideration as they find it
too risky for investments. They believe it is not a suitable tool for predicting the future values
of the currencies because it is impossible to get them accurately.

Evaluation
Based on the research conducted, there are several hedging tools that can be used to hedge our
position against currency exchange rates fluctuations.
There 4 payments that are required to hedge and one receivable account. Below is the table explaining
the calculations made to offset the company position.
Date
Currency
Amount
Amount In USD
Cash available in bank
USD
$7,750,000.00
30 October 2014
EUR
EUR 465,000
USD 564,975.00
11 November 2014
JPY
JPY 1,500,000
USD 14,389.18
12 December 2014
GBP
GBP 900,000 USD 1,390,500.00
25 December 2014
JPY
JPY 11,000,000
USD 1,678.74
31 December 2014
KWD
KWD 175,000
USD 614,682.12

Position

Hedging Tool

OutFlow
Call Option
OutFlow Forward Contract
OutFlow
Call Option
OutFlow Forward Contract
Inflow Forward Contract

The table above represents the payment dates the amount of payments in foreign currency and
the equivalent of them in USD.
The following calculations will explain in depth what happened from trading date September 1 2014
until the payment day in each payment and receivable day.
First on October 30 2014 EUR/USD", to hedge the first payment and avoid exchange rate appreciated
and depreciated, the team decided to buy call option American style At the Money on September 1
2014 and if the spot price is less than the strike price, the option will exercised. (Appendix 1).
Options
Option Type
Payment Amount Prior Settle Strike Spot Market Price On Sep 1
Call Option
EUR 465,000.00
0.0241
1.215
1.3128
Option Cost
USD 14,711.89
Exercises the Option USD 564,975.00
Total Cost
USD 579,686.89
Step 1: Purchase Call Option:
September 1 2014
1. Cost of Option= size of option * premium * spot rate
=EUR 465,000.00*0.0241*1.3128
Cost of Option = USD 14,711.89
The spot price in October 28 2014 because the settlement is after 2 days if we enter spot market is
(1.2734) the strike price is lower so we exercise the option.
October 30 2014
2. Exercise the option to pay the obligation
Exercise the Option= EUR 465,000.00*1.215= USD 564,975.00
3. Total Option Cost= Option Cost + Exercise the Option
USD 14,711.89+ USD 564,975.00= USD 579,686.89

Step 2:
September 1 2014
Invest the amount needed to exercise the option USD 2 months LIBOR, to benefit from interest income
and reduce the payment required in USD.
Money Market
Time Period
Payment Amount USD Interest Rate EUR Interest Rate
60 Days
0.19675%
0.09714%
USD 564,789.80
Option Payment USD 564,975.00

1. The required amount to invest today September 1 2014=

USD 564,975/(1+0.19675%)*(60/360)= USD 564,789.80
2. Principle + Interest on October 30 2014=
USD 564,789.80*(1+0.19675%)*(60/360)= USD 564,975.00
3. The exact amount needed to pay for exercising the option and get EUR 465,000 is USD
564,975.00.
(Appendix 1)
The Second Payment on November 11 2014, USD/JPY", to hedge the second payment and avoid
exchange rate appreciated and depreciated, the team decided to enter forward contract on September
1 2014 to exchange USD to JPY on November 11. (Appendix 2).
Forward Market
Payment Amount Forward Rate Amount Required on NOV 11 by $
JPY 1,500,000.00
104.245
USD 14,389.18

Step 1:
On September 1 2014:
1. To calculate the equivalent amount of USD needed to pay JPY 1,500,000.00=
= JPY 1,500,000.00 *(1/104.245)= USD 14,389.18
On November 11 2014:
2. Transfer USD to JPY on Forward market:
USD 14,389.18 *104.245= JPY 1,500,000.00

Step 2:
September 1 2014
Invest the amount needed to exchange in forward market in USD 71 days LIBOR, to benefit from interest
income and reduce the payment required in USD.
Money Market
Time Period
Payment Amount USD Interest Rate JPY Interest Rate
71 Days
JPY 1,500,000.00
0.19675%
0.32643%
Lend to the Market
USD 14,384.46
USD 14,389.18
1. The required amount to invest today September 1 2014=
USD 14,389.18 /(1+0.19675%)*(60/360)= USD 14,384.46
2. Principle + Interest on November 11 2014=
USD 14,384.46*(1+0.19675%)*(60/360)= USD 14,389.18
3. The exact amount needed to pay JPY 1,500,000.00 is USD 14,389.18.
(Appendix 2)
The third payment on December 12 2014 GBP/USD", to hedge the first payment and avoid exchange
rate appreciated and depreciated, the team decided to buy call option American style At the Money
on September 1 2014 and if the spot price is less than the strike price, the option will exercised.
(Appendix 3).
Options
Option Type

Payment Amount

Call Option
GBP 900,000.00
Option Cost
USD 38,710.92
Exercises the Option USD 1,390,500.00
Total Cost
USD 1,429,210.92

Prior Settle Strike Spot Market Price On Sep 1

0.0259

1.545

Step 1: Purchase Call Option:

September 1 2014
1. Cost of Option= size of option * premium * spot rate
= GBP 900,000.00 *0.0259*1.6607
Cost of Option = USD 38,710.92

1.6607

December 12 2014
The outlook spot price of December 10 2014 because the settlement is after 2 days if we enter spot
market is (1.63) the strike price is lower so we exercise the option.
2. Exercise the option to pay the obligation
Exercise the Option= GBP 900,000.00 *1.545= USD 1,390,500.00
3. Total Option Cost= Option Cost + Exercise the Option
USD 38,710.92 + USD 1,390,500.00= USD 1,429,210.92

Step 2:
September 1 2014
Invest the amount needed to exercise the option in 102 days USD LIBOR, to benefit from interest
income and reduce the payment required in USD.
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

1. The required amount to invest today September 1 2014=

USD 1,390,500.00 /(1+0.23360%)*(90/360)= USD 1,389,699.53
Principle + Interest on December 12 2014=
2. USD 1,389,699.53 *(1+0.23360%)*(90/360)= USD 1,390,500.00
3. The exact amount needed to pay for exercising the option and get GBP 900,000.00 is USD
1,390,500.00.
(Appendix 3)
The fourth Payment on December 25 2014, USD/JPY", to hedge the second payment and avoid
exchange rate appreciated and depreciated, the team decided to enter forward contract on September
1 2014 to exchange USD to JPY on December 24 2014, the reason to settle the payment one day before
is that on 25-Dec is Christmas and all banks are closed. (Appendix 4).
Forward Market
Payment Amount Forward Rate Amount Required on DEC 25 by $
JPY 175,000.00
104.245
USD 1,678.74

Step 1:
On September 1 2014:
1. To calculate the equivalent amount of USD needed to pay JPY 175,000.00=
= JPY 175,000.00 *(1/104.245)= USD 1,678.74
On December 25 2014:
2. Transfer USD to JPY on Forward market:
USD 1,678.74 *104.245= JPY 175,000.00

Step 2:
September 1 2014
Invest the amount needed to exchange in forward market in USD 114 days LIBOR, to benefit from
interest income and reduce the payment required in USD.
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
1. The required amount to invest today September 1 2014=
USD 1,678.74 /(1+0.23360%)*(90/360)= USD 1,677.76
2. Principle + Interest on December 24 2014=
USD 1,677.76 *(1+0.23360%)*(90/360)= USD 1,678.74
3. The exact amount needed to pay JPY 175,000.00 is USD 1,678.74.
(Appendix 4)
On December 31 2014 there is an account receivable:
To hedge the account receivable the team will use forward market to avoid exchange rate fluctuating.
(Appendix 5).
Forward Market
Received Amount Forward Rate Amount on Dec 31 in $
KWD 175,000.00
0.2847
USD 614,682.12

On September 1 2014:
1. The rate was set for future exchange = 0.2847
On December 31 2014:
2. Transfer KWD to USD on Forward market:
KWD 175,000.00*(1/0.2847)= USD 614,682.12 Inflow

Investing Strategy
The next step after calculating the outflows and inflows, and deduct it from the balance available in
bank, the plan is to invest the remaining balance. The company will lose money if they kept the money
in account and dont invest them in the market.
The investing strategy:
On September 1 2014:
The following balance was determined:
Cash available in bank
Total Outflow
Remaining

$7,750,000.00
USD 2,024,965.73
USD 5,725,034.27

After deducting the required amount of each payment the cash available in bank is USD 5,725,034.
Step 1: First investment is to invest in 3 month time deposit: (Appendix 6)
Time Deposit 3 Months
Amount Invested in Time Deposit
USD 5,725,034.27
Rate
10%
Bank
CBZ BANK
Monday, September 01, 2014
Monday, December 01, 2014

Enter 3 months time deposit Time Deposit USD 5,725,034.27

Receive the principle and interest
USD 6,297,537.70
USD 572,503.43
Profit

1. Enter 3 months time deposit Time Deposit by USD 5,725,034.27 on September 01, 2014.
2. Receive the principle and interest on December 01, 2014=
=5,725,034.27*(1+10%)= USD 6,297,537.70
3. Profit= USD 6,297,537.70-5,725,034.27= USD 572,503.43

Step 2: Second invest the cash available in bank On December 1 2014 invest in one month USD
LIBOR: (Appendix 7)
Time Deposit 1 Months
Amount Invested in 1 Month LIBOR
USD 6,297,537.70
Rate
0.15550%
Monday, December 01, 2014
Wednesday, December 31, 2014

USD 6,297,537.70
Enter 1 month USD LIBOR
Receive the principle and interest USD 6,298,353.76
USD 816.06
Profit

1. Enter 3 months time deposit Time Deposit by USD 5,725,034.27 on December 01, 2014.
2. Receive the principle and interest on December 31, 2014=
= USD 6,297,537.70*(1+0.15550%)*(30/360) = USD 6,298,353.76
3. Profit= USD 6,298,353.76-USD 6,297,537.70= USD 816.06

The balance at bank at the end of the period On December 31 2014:

The balance at bank on December 31 2014
Receive the principle and interest
Inflow on December 31 2014
Total amount on Bank on December 31 2014

USD 6,298,353.76
USD 614,682.12
USD 6,913,035.88

1. On December 31 2014, there is an inflow USD 614,682.12 it will be add to the amount invested
in one month LIBOR. The total balance in bank is USD 6,913,035.88.

Suggestions
To raise Blue Sea sales growth, the investment strategy should be improved, as in the last 5
years the sales growth was slow at an average of 2.5% yearly. To raise their position, blue sea should
apply alternative investment strategies rather than suggested above. For example first take USD
5,000,000 bank loan and invest it in time deposit in ICBC Argentina for 2 months with 24.5% interest
(Appendix 8), first exchange the currency in spot market then deposit it in the bank every 2 months until
10 months, the return rate will be in average of 122.5% by then. The second idea is to benefit from short
term investments such as daily spot market, arbitrage, and overnight to assure daily liquidity and there
is cash available in hand. By increasing their profits they should increase their sales and new marketing
plans to grow their current position.
There are several types of investment strategies but because of the short period that the team
has, we chose the highest liquidity and limited risk to assure that we will not lose any money and offset
our balance by using proper hedging tools.

Summary & conclusion

To conclude there are many reasons in any business that results in losing their money.
Moreover, the report has shown different methods and strategies to avoid this or to reduce
the risk of it. Where if the person studies the market well and set a plan, he/she will be able
to hedge or invest to save their position and gain money as well in the same time. Basically,
this report has clarified various ways to do so such as using the options and forward contracts
in the FX market and as well investing in Libor and time deposit. These methods have been
chosen after examining the market from different perspectives and we think it is the best way
to get profit. As well, the other elements have been declared in the previous paragraphs.
Moreover, a brief explanation about each currency was provided to get to know the currency
you are dealing with. In addition, the provided suggestions will help to improve our strategy.

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Appendix
Appendix 1
EUR option price

EUR/USD spot rate on September 1 2014:

EUR/USD spot rate on October 30 2014:

USD 2 Month LIBOR:

Appendix 2
1. Forward Rates on September 1, 2014

USD 2 Month LIBOR:

Appendix 3
1. GBP/USD Spot Rate:

GBP option price

USD 3 Month LIBOR

Currency outlook December 2014

Appendix 4
USD/JPY forward rate

USD 3 Month LIBOR

Appendix 5
USD/KWD forward rate

Appendix 6
3 Months Time deposit rate

Appendix 7
1 month LIBOR deposit:

Appendix 8
2 Months Time Deposit

Appendix 9

Appendix 10