Explore BrainMass

Explore BrainMass

    How to hedge commercial paper risk

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    I'm working through problems in the textbook in preparation for a test and this is the only one I can't figure out. Wondering if I could get some help. Thanks.

    If it is Feb. 20th and the treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with 180 day maturity. If the paper were issued today, the company would receive $4.82 million. In 180 days, the company will have to redeem the commercial paper for $5 million. The September Eurodollars future price is quoted as 92.00. How would the treasurer hedge the company's risk exposure?

    © BrainMass Inc. brainmass.com March 4, 2021, 6:13 pm ad1c9bdddf
    https://brainmass.com/business/finance/how-to-hedge-commercial-paper-risk-35606

    Solution Preview

    The problem is that on 20th Feb., the treasurer realizes that the company will have to issue $5 million of commercial paper with 180 days maturity on July 17th. If the paper were issued today, the company would receive $4.82.million.
    Now, according to the plans of the company, receiving $4.82 million on July 17 is acceptable. However, the commercial paper is transnational and in the interim there could be a change in the foreign exchange rate away from 92.00 causing the plans of the company to go haywire. For instance, if the September Eurodollars rate swung in favor ...

    $2.49

    ADVERTISEMENT