5.5. USING FORWARD CONTRACTS (4): MINIMIZING THE IMPACT OF MARKET
IMPERFECTIONS 193
- Identify your desired end position;
- Calculate the outputs for each of the two routes that lead from yourSTART
to yourEND; - Choose by applying theMore Is Betterrule: more output for a given level of
input is always desriable.
Example 5.18
Ms Takeshita, treasurer of the Himeji Golf & Country Club (HG&CC) often faces
problems like the following:
- A foreign customer has promised a large amount ofusd(=fc), but today the
Club needsjpycash to pay its workers and suppliers and does not like the
exchange risk either. Should the Club borrow dollars or yens? - The next day there are excessjpyliquidities that should be parked, risk-free.
ShouldHG&CCgo for a Yen deposit, or a swapped dollar one? - Two days later the Club wants to earmark part of itsjpycash to settle ausd
liability expiring in six months. Should they keep yens and buy forward, or
move into dollars right away? - One week later,HG&CCreceivesusdfrom a customer, and orders new irons
payable inusd180d. Should the currentusdbe deposited and used later on
to settle the invoice?
On her laptop she sees the following data:
spot jpy/usd99.95 - 100.05 180d jpy/usd98.88 - 99.16
(spread 0.10) (spread 0.18)
jpy, 180d 1.90 - 2.10% p.a., simple usd, 180d 3.90 - 4.10% p.a., simple
(0.95 - 1.05% effective) (1.95 - 2.05% effective)Having taken this course, Ms Takeshita organizes the data into the familiar diagram
(Figure 5.7) and sets to work. Her calculations, which take her a mere 90 seconds,
are neatly summarized in Table 5.1.
Note how all computations start with one unit. The true amounts are all missing
from the calculations and even from the data, thus forcing you to focus on the route.
In practice, once you found the best route, you can then re-scale everything to the
desired size. For instance, in application 1, if the futurefcincome isusd1.235m,
the output is proportionally higher too.
In this context, let me point out a frequent mistake in case of problems like
application 3. Assume the liability isusd785,235. We just found that the best