How to hedge commercial paper risk
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?
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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 ...