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# currency option or currency swaption

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Scenario:

Primetime Systems, Inc. now has total worldwide revenues of over \$820 million forecast for this coming year.

You have operations in the United States of \$450 million with a 12% ROS (return on sales),

operations in Germany of ?200 million with an a return on sales (ROS) of 11%,

and operations in Shanghai, China, of 990 million yuan with an ROS of 9%.

You expect to repatriate all the ROS to the U.S. when available in 12 months.

Assignment

1. Determine the spot and 12-month forward exchange rates and determine any change in the ROS repatriated in 12 months based on exchange rates versus the current forecast.

2. Describe the repatriation using a spot transaction, an outright forward, and a foreign-exchange swamp.

3. Would there be any use or benefit in using a currency option or currency swaption?

4. Describe each.

5. How would you advise the company to handle the repatriation?

https://brainmass.com/economics/contracts/currency-option-or-currency-swaption-256823

#### Solution Preview

1. http://www.fxstreet.com/technical/currencies-glance/pair.aspx?id=USD/CNY
Use this place to get the forward rate for USD-CNY.
Today it is 6.83
1 year later 6.87

http://www.fxstreet.com/technical/currencies-glance/pair.aspx?id=EUR/USD
Use this place to get the forward rate for EUR-USD.
Today it is 1.4039
1 year later 1.57

In Germany we have
Sales: 200 million Euros
Return on Sales: 11%, or 22 million Euros

In China we have
Sales: 990 million Yuan
Return on Sales: 9%, or 89.1 million Yuan

In the US we have
Sales: \$450 million
Return on Sales: 12%, or \$54 million

Today 22 million Euros is worth \$30.8 million (22*1.4039)
One year later: \$34.54 million (22*1.57)

Today 89.1 million Yuan is worth \$13.045 million (89.1/6.83)
One year later: \$12.969 million (89.1/6.87)

Total sales in USD: \$(450+281+145) = \$876 million (Using today's exchange rate)