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currency option or currency swaption

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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.


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?

6. Please cite all references

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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

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)
Return today $97.845 million, or 11.16%
Return one year later is $101.509 million (if the forward rates turn out to be true), or 11.58%

2. Spot transaction: A foregin exchange transaction in which each party promises to pay a certain amount of currency to the other on the same day or within one or two days. You can use this at the end of the year when you decide to repatriate the profits. Thus you will repatriate about 22 million Euros and about 89 million Yuan in a year's time. The company will exchange this for the prevailing rate to USD and bring them back home. If the forward rates hold on the day of the transaction the company gets a 11.58% return on sales for the year.

Forward: A forward contract or simply a "forward" is an agreement between two parties to buy or ...

Solution Summary

The benefit in using a currency option or currency swaption is included.