Treasury and Risk Management for Swiss Exporters- myassignmenthelp

Question: Discuss about theTreasury and Risk Management for Swiss Exporters. Answer: Discussing the reason for SNB de-pegging of Franc, while evaluating the hedging strategies implemented by Swiss exporters On January 2011, Swiss National Bankmade a decision, which changed the value of franc and is considered one of the dark days for stock market of the country. This de-pegging decision made by Swiss National Bankwas based on certain assumptions and actions that was taken by different bank all around the world. The event resulted in major devaluation of Swiss Franc, which hampered their currency valuation in comparisons to other countries (Bishop 2015). The reason behind Swiss National Bankconducting the de-pegging are depicted as follows. Accumulation of high Euro and foreign currency reserve: During the period of pegging conducted by Swiss National Bank, it mainly accumulated high foreign reserve and Euro for reducing the rising valuation of Swiss Franc. In addition, the increasing accumulation of foreign currency was maintained by raising the supply of Swiss Franc by Swiss National Bank. The high demand of Swiss Franc mainly increased valuation of the currency, while hampering their international trade. This rising supply of Swiss Franc increased the chance of hyperinflation within the country, as evaluated by business and analyst. In addition, Swiss National Bank accumulated 480 billion worth of foreign reserve, which comprises 70% of the GDP (Admiral Markets 2018). This high accumulation of foreign reserve mainly reduced the actual valuation of Swiss Franc against other currencies. In this context, Skinner (2016) stated that Central Bank of countries use the foreign reserve to maintain the valuation of their currency, which helps in reducing the negative impact of vola tile currency market. Devaluation of Euro against other countries: The euro valuation has relatively declined over the period, which resulted in the devaluation of euro and Swiss Franc. Moreover, the euro valuation has relatively declined over the period, which in turn reduces the value of Swiss Franc due to high accumulation of currency by Swiss National Bank. The Europeans Central Bank started with the easing policy for rising the inflation rate and supplying more currencies for buying bonds of Euro-Zone counties. This rising production and supply of Euro with the currency market mainly devalued the overall currency. In addition, this devaluation resulted in the decline of Swiss franc due to their exposure and accumulation of 480 billion foreign reserves. Therefore, the devaluation of Euro increased, which is hindering progress of the economy. Kim and Chance (2018) stated that the devaluation of currencies mainly hampers trade and export profits of the country, which in turn hampers their actual GDP growth. The Strategic measures taken by European Central Banks mainly increased the devaluation of Euro and in turn hamper the valuation Swiss Franc. The above-mentioned reasons mainly initiated Swiss National Bank to conduct the de-pegging, which was being continued. This halt in operations was due to the decline in Swiss Franc, which was intended by Swiss National Bank form the start. Therefore, Swiss National Bank during January 2011 for determining the actual value of Swiss Franc stopped the pegging process. Swiss National Bank with the help of de-pegging measure was able to controlling the hyperinflation, which was evaluated by analyst. The exporter of Switzerland would eventually use adequate hedging process for curbing the rising volatility in the currency market and make maximum of the profits from the transactions. The use of option hedging strategy would be helpful for the exporters for hedging their exposure in the international market. Du and Schreger (2016) stated that hedging process allows exporters for curbing the volatilities in the currency market and fix their payment by using adequate hedging measures. In addition, the use of money market hedge is also a viable approach, which could be used by investors in reducing the negative impact of changing currency prices. On the other hand, Caldentey and Haugh (2017) criticises that without the use of adequate knowledge about the hedging measure the exporter might increase their risk and increase losses from the transaction. Moreover, the Swiss exporters could use both hedging positions for effectively reducing the negative impact of volitively Swiss Franc. Bo th option hedging strategy and money market strategy is a viable approach that might be used by the exporters for fixing their future payments. Identifying the risk of each strategy and estimating the dollar cash flows it will receive because of using each strategy: Particulars Amount Rate Payment 50,000,000 Probability to go up $ 60,000,000 1.2 Probability to go down $ 40,000,000 0.8 Un-hedge strategy Value Value Payment 50,000,000 Spot rate $ 1.10 $ 55,000,000 Probability of spot price in 1 yr $ 1.20 $ 60,000,000 Loss in un-hedging $ 0.10 $ 5,000,000 Probability of spot price in 1 yr $ 0.80 $ 40,000,000 Profit from un-hedging $ 0.30 $ 15,000,000 Forward hedge strategy Value Value Payment 50,000,000 Spot rate $ 1.10 $ 55,000,000 Forward rate $ 1.13 $ 56,500,000 Probability of spot price in 1 yr $ 1.20 $ 60,000,000 Loss in hedging $ 0.07 $ 3,500,000 Probability of spot price in 1 yr $ 0.80 $ 40,000,000 Profit from hedging $ 0.03 $ 16,500,000 Money market hedge Value Value Payment 50,000,000 interest in Euro 2.00% 1,000,000 Amount in euros borrowed 49,000,000 Spot rate $ 1.10 $ 53,900,000 interest in US 5.50% $ 2,964,500 Total payment received in 1 yr $ 56,864,500 Probability of spot price in 1 yr $ 1.20 $ 60,000,000 Loss in hedging $ 3,135,500 Probability of spot price in 1 yr $ 0.80 $ 40,000,000 Profit from hedging $ 16,864,500 Option Hedge Put Option Value Value Payment 50,000,000 Put option 1.11 Exercise price 0.06 Total value of put option 1.05 $ 52,500,000 Probability of spot price in 1 yr $ 1.20 $ 60,000,000 Loss in hedging $ 0.15 $ 7,500,000 Probability of spot price in 1 yr $ 0.80 $ 40,000,000 Profit from hedging $ 0.25 $ 12,500,000 Option Hedge Call Option Value Value Payment 50,000,000 Cal option 1.15 Exercise price 0.08 Total value of put option 1.07 $ 53,500,000 Probability of spot price in 1 yr $ 1.20 $ 60,000,000 Loss in hedging $ 0.13 $ 6,500,000 Probability of spot price in 1 yr $ 0.80 $ 40,000,000 Profit from hedging $ 0.27 $ 13,500,000 From the evaluation of above table, the risk and cash flow can be identified, which could be used by ABC company to identify the best possible hedging strategy. In addition, the unhedged policy is the one strategy, which has the higher risk of loss that might incur by the company. Moreover, other hedging strategy has relevant risk and reward attribute, which reduces the risk from payment substantially and fixes the exchange value, which might incur in one-year time. Alvarez and Hansen (2017) mentioned that with hedging measure investor can curb the rising risk from currency market. Explaining the hedge that is optimal for ABC: Hedging Strategies Profit Loss Un-hedge strategy $ 15,000,000.00 $ 5,000,000.00 Forward hedge strategy $ 16,500,000.00 $ 3,500,000.00 Money market hedge $ 16,864,500.00 $ 3,135,500.00 Option Hedge Put Option $ 12,500,000.00 $ 7,500,000.00 Option Hedge Call Option $ 13,500,000.00 $ 6,500,000.00 From the overall evaluation of the above table, money market hedge is identified to be the most beneficial, as it incurs the least loss, while obtaining the highest profit in both probable conditions. In this context, lvarez Espinoza and Hansen (2017) stated that the money market hedging allows investor to conduct trade on the specific trades, which could reduce risk from changing exchange rate. Reference and Bibliography: Admiral Markets (United Kingdom). (2018).Price shock: when the Swiss National Bank unpegged the Swiss franc from the euro. [online] Available at: https://admiralmarkets.com/analytics/traders-blog/price-shock-when-the-swiss-national-bank-unpegged-the-swiss-franc-from-the-euro [Accessed 23 Mar. 2018]. lvarez Espinoza, R. and Hansen, E., 2017.Corporate currency risk and hedging in Chile: Real and financial effects(No. IDB-WP-769). IDB Working Paper Series. Alvarez, R. and Hansen, E., 2017.Corporate Currency Risk and Hedging in Chile: Real and Financial Effects. Inter-American Development Bank. Bishop, K. (2015).Swiss franc soars, stocks tank as euro peg scrapped. [online] CNBC. Available at: https://www.cnbc.com/2015/01/15/swiss-franc-sours-stocks-tank-as-euro-peg-scrapped.html [Accessed 23 Mar. 2018]. Boudoukh, J., Katz, M., Richardson, M.P. and Thapar, A., 2015. Risk Without Reward: The Case for Strategic FX Hedging.AQR, September, pp.45-50. Caldentey, R. and Haugh, M., 2017. A Cournot-Stackelberg Model of Supply Contracts with Financial Hedging and Identical Retailers.Foundations and Trends in Technology, Information and Operations Management,11(1-2), pp.124-143. Du, W. and Schreger, J., 2016. Local currency sovereign risk.The Journal of Finance,71(3), pp.1027-1070. Kim, S.F. and Chance, D.M., 2018. An empirical analysis of corporate currency risk management policies and practices.Pacific-Basin Finance Journal,47, pp.109-128. Skinner, W.R., 2016. CFC-Level Hedges of Currency RiskA Review.International tax journal, p.14. Yaganti, C.H., Kamaiah, B. and Gupta, H., 2015. Exchange Traded Currency Future Markets and Risk Management in India.Journal of International Economics,6(2), p.13.