Hedging at AIF- Case study

Optimistic Marginal Weak

Covered Call 30000 25000 10000

Stable $ 1.22 E
Strong $ 1.01 E
Weak $ 1.48 E

? Hedging or no Hedging
Options premium 5% 1525

Decision 100% coverage

Stable Strong Weak Strong
Units 1.22 1.01 1.48
25%forwards 6250 0 -1312.5 1625
75% options 18750 -1143.75 -1143.75 3731.25 -2456.25
50% forwards 12500 0 -2625 3250
50% options 12500 -762.5 -762.5 2487.5 -3387.5
75% forwards 18750 0 -3937.5 4875
25% options 6250 -381.25 -381.25 1243.75 -4318.75
Go for 1st

Decision 75% coverage 18750

Stable Strong Weak Strong
Units 1.22 1.01 1.48
100% Forwards 18750 0 -3937.5 4875
0% options 0 0 0 0 -3937.5
25%forwards 4687.5 0 -984.375 1218.75
75% options 14062.5 -857.8125 -857.8125 2798.4375 -1842.1875
50% forwards 9375 0 -1968.75 2437.5
50% options 9375 -571.875 -571.875 1865.625 -2540.625
75% forwards 14062.5 0 -2953.125 3656.25
25% options 4687.5 -285.9375 -285.9375 932.8125 -3239.0625
0% Forwards 0 0 0 0
100% Options 18750 -1143.75 -1143.75 3731.25 -1143.75
Go for 5th
Decision 50% coverage 12500
Stable Strong Weak Strong
Units 1.22 1.01 1.48
100% Forwards 12500 0 -2625 3250
0% options 0 0 0 0 -2625
25%forwards 3125 0 -656.25 812.5
75% options 9375 -571.875 -571.875 1865.625 -1228.125
50% forwards 6250 0 -1312.5 1625
50% options 6250 -381.25 -381.25 1243.75 -1693.75
75% forwards 9375 0 -1968.75 2437.5
25% options 3125 -190.625 -190.625 621.875 -2159.375
0% Forwards 0 0 0 0
100% Options 12500 -762.5 -762.5 2487.5 -762.5
Go for 5th

Decision 25% coverage 6250

Stable Strong Weak Strong
Units 1.22 1.01 1.48
100% Forwards 6250 0 -1312.5 1625
0% options 0 0 0 0 -1312.5
25%forwards 1562.5 0 -328.125 406.25
75% options 4687.5 -285.9375 -285.9375 932.8125 -614.0625
50% forwards 3125 0 -656.25 812.5
50% options 3125 -190.625 -190.625 621.875 -846.875
75% forwards 4687.5 0 -984.375 1218.75
25% options 1562.5 -95.3125 -95.3125 310.9375 -1079.6875
0% Forwards 0 0 0 0
100% Options 6250 -381.25 -381.25 1243.75 -381.25
Go for 5th
 Expected sales volume is 25000 units

Stable Strong Weak

1.22 1.01 1.48

No hedge 0 5250 -6500

100 % Hedge forwards 0 -5250 6500

100% Hedeg Options -1525 -1525 4975

Expected sales volume is 30000 units

Stable Strong Weak

1.22 1.01 1.48
No hedge 0 6300 -7800
100 % Hedge forwards 0 -4200 5200
Weak 100% Hedeg Options -1525 -475 3675

5356.25 Expected sales volume is 10000 units

Stable Strong Weak
5737.5 1.22 1.01 1.48
No hedge 0 2100 -2600
6118.75 100 % Hedge forwards 0 -5250 6500
Go for 3rd 100% Hedeg Options -1525 -1525 4975

Weak

4875

4017.1875

4303.125

4589.0625

3731.25
Go for 1st
Weak

3250

2678.125

2868.75

3059.375

2487.5
Go for 1st

Weak

1625

1339.0625

1434.375

1529.6875

1243.75
Go for 1st
 No profit
30500 no loss
1525 Premium
In forwards when dollar is weak we are gaining and in options the
loss is less. But company shold go for forwards contract
It is upto a company also if it is conservative then forwards if very
conservative then no hedgeing 1250
1925

No profit
30500 no loss
1525 Premium

1675

1525 Premium

1925

Premium
The company will gain more in options contract but company is conservative
and is comfortable with forwards contract .

if we compare options gives better returns then forwards

 Cost of Capital
Decision of prefering cost of debt or equity also raising funds from domestic mk
Aim WAAC should be lowest
Steps
1 Calculate Inidvidual cost
2 Calculate WAAC Foreign currency
* Book Value
* Market Value Debt
Euro Bond

Int rate Exchange rate Segmented

Tutorials

Q1 Debt 33.33% COD 7% Q3

Euity 66.67% COE 12%

WAAC 10.33%

Q2 Debt 35% COD 7% Q4

Euity 65% COE 14%

WAAC 11.55% 12.90

Q6 COE 6.75% A

Global beta 0.15

Mkt premium 5%

Risk free int 6%

B
 C

Q7 US YEN Q8

DEBT 50000000 50000000 DEBT

COD 8% 2% COD
Expected Yield 6% Expected Yield
COD pre tax 7.00% COD pre tax
COD post tax 4.69% COD post tax
Risk free rate 6% 2% Risk free rate
Tax shiled 33% Tax shiled
Beta 85% Beta
Risk prm glo 4% Risk prm glo
COE 9.4% COE

Debt ratio 25% COD 4.69% Debt ratio

Eq 75% COE 9.4% Eq

WAAC 8.22% WAAC

ng funds from domestic mkt or international mkt

Company MNC
what will be the capital structure ?
*parent companies capital structure
*own capital structure
Equity *combination of both

Integrated
*ADR
*GDR Are used to raise equity from different countries
*IDR

Cross Listing helps in reducing the global systematic risk

Low cost of Better image in the intl mkt

capital

Debt 40% COD 5%

Euity 60% COE 12% Q5
Mechel
WAAC 9.28% ke 10.79 Russia

World
Correlation Coefficients
Telmex Mexico World SD (%) R
Telmex 1 0.9 0.6 18 b
Mexico 1 0.75 15 14
World 1 10 12 1.2
0.0666667
b
Riskfree
1.08 Domestic beta rate
1.08 World Beta mkt risk
CAMP
Beta
Riskfree rate 5%
mkt risk 14%
CAMP 14.72%
Beta 1.08

Integrated 12.56%

US YEN 11 Exchange aRates

40000000 60000000 1 usd 5.6 DKK

7% 1.5%
6% Expected 5.7568
6.37500% 5.918
4.14%
5.75% 1.25% 1 2
35% Interest rate 600000 600000
1.10 4
4%
10.2%

35% COD 4.14%

65% COE 10.2%

8.05%
Mechel Russia World SD(%) (%)
R
1 0.9 0.6 20 ?
1 0.75 15 11

1 10 9

4%
11%
12.40% 10.792
1.2
 3
600000
2
 arears Currency

Time 0 50 1

Time 1 60 1.25

Local rretu 20

50%

Business man has 500 dollar

Time 0 500$ 10share @10

Time 1 600 750

return 50
10share @10

Principle of Uncovered Interest arte parity

IRD based on difference in forex rates

 Capital Budegting

Multinational Capital budgeting

M&A Subsidiary JV FDI

Project
Factors take into consideration while selceting the project
1 Discount rate
2 Exchange rate Subsides
3 Govt Policies
*Repatriattion of profits /Blocked funds
*Withold taxes
*Transfer pricing
4 Fininacing pattern

in ZAR ZAR to USD

Q1 Intial cost 10000 WACC 9.50%
3000 Inflation 3.8956311 3000

4000 US 3% 4.0469177 4000

5000 Africa 7% 4.2040796 5000
6000 4.3673448 6000
7000 4.5369504 7000

SPOT Rate ZAR 3.75 USD NPV

Exchange rate 7%

Q2 Intial cost 10000 WACC 9.50% ZAR to USD

2500 Inflation 1.3297087 2500
4000 US 3% 1.3813479 4000
5000 ZAR 7% 1.4349925 5000
6000 1.4907204 6000
7000 1.5486124 7000

Exchange rate ZAR 1.28 USD NPV

Q3 Intial cost 15500 WAAC 12% EURO to USD
4500 Inflation 1.2965217 4500
6750 US 6.5% 1.3727717 6750
8250 Euro 3.25% 1.4956366 8250

50000

SPOT Rate Euro 1.26 USD NPV

Q1 ( 2018 batch)

in ZAR ZAR to USD

Intial cost 100000 WACC 9.50%
30000 Inflation 16.621359 30000
31500 US 3% 17.266849 31500
40000 Africa 7% 17.937406 40000
42000 18.634004 42000
50000 19.357655 50000

SPOT Rate ZAR 16 USD NPV

Exchange rate 7%

in ZAR ZAR to USD

Intial cost 100000 WACC 9.50%
30000 Inflation 16.621359 30000
31500 US 6.50% 17.266849 31500
40000 Africa 3.25% 17.937406 40000
42000 18.634004 42000
50000 19.357655 50000
SPOT Rate ZAR 12 USD NPV

Exchange rate 3%
 Methods to evaluate capital budgeting
*IRR *MIRR
*NPV *MNPV
*Profitability Index
*Adjusted Prseent Value
Calculate conventional cf

in USD
Q4 Intial cost 60000000
$770.09 unts produced 20000

$988.41 Sales 440000000

$1,189.32 operating cost 360000000
$1,373.83 profit befor dep 80000000
$1,542.89 Dep 12000000
$2,666.67 Profit befor tax 68000000
$1,702.49 Tax 55% 37400000
PAT 30600000
Cash flows 42600000

NPV $78,620,852.61
$3,324.27 Bloacked 2000000
$5,525.39 PV of tax savings in royalty pay
$7,174.96 Savings in prod $20,923,228.84
$8,944.32 APV $101,544,081.45
$10,840.29
$12,800.00
$13,416.43 Q5 Loan 15000000
Int rate 4%
US 6%
 Damish krones 5.50%

5834.347826087 SPOT rate 5.6

9266.209007972 Inflation
12339.00219706 US 3%
19530 Denmark 2.50%

$1,848.9
Q6

Intial cost 60000000

unts produced 2000

Sales 1400000000
operating cost 600000000
profit befor dep 800000000
Dep 160000000
Profit befor tax 640000000
Tax 55% 224000000
PAT 416000000
Cash flows 576000000
in USD
NPV $574,285,714.29
$1,804.91 Bloacked 2000000
$1,824.31 PV of tax savings in royalty pay
$2,229.98 Savings in prod $747,258,172.87
$2,253.94 APV $1,323,543,887.15
$2,582.96
$6,250.00
$1,826.83

in USD

$1,804.91
$1,824.31
$2,229.98
$2,253.94
$2,582.96
 $6,250.00
$1,826.83
PAT-dep equity
+PV of savings Separet rate

WAAC 12% SPOT Rate

Tax saving on
Royalty 8800000 royalty 4840000
1320000

Savings in production 28000000 $20,923,228.84

DKK/USD

WAAC 12% SPOT Rate

Tax saving on
Royalty 28000000 royalty 9800000
5040000

Savings in production 1000000000 $747,258,172.87

Q2 Cash flow

0 -10000 1.28 -12800

1 2500 1.316923 3292.307692

2 4750 1.354911 6435.828402

3 6250 1.393995 8712.47013

₹921

12800

0.065 920

3 0 -15500 1.26 -19530

1 4500 1.299661 5848.475

2 6750 1.34057 9048.85

3 8250 1.382768 11407.83

19530 ₹1,025.41
18440.61