Series of lectures from Brian Butler, given during fall 2008 session at Thunderbird Global MBA, Miami campus: This lecture 03: learn to utilize hedging techniques to eliminate currency risks for international business.

1. Contact Information: Brian David Butler Miami Campus Facilitator International Economics & Trade (Prof. Grosse) Email: [email_address] Cell: 786-457-0984 Blog: http://blog.globotrends.com/ Wiki: http://kookyplan.pbwiki.com/brianbutler Connect professionally: http://www.linkedin.com/in/briandbutler http://www.linkedin.com/e/gis/69362 Connect personally: http://www.facebook.com/people/Brian_Butler/293500110

4. Why hedge? (don’t be these guys!) Sadia , the blue-chip food giant, admitted on Friday that it had lost R$760m ($416m) on currency derivatives – equivalent to nearly a third of last year’s annual profits. The firm promptly sacked its chief financial officer, Adriano Lima Ferreira. Aracruz , the paper and pulp firm, also said it had made large losses on currency bets but did not specify the amounts. Isac Zagury, its CFO, resigned. http://www.ft.com/cms/s/0/39d256f8-8e87-11dd-9b46-0000779fd18c.html?nclick_check=1

5. Why hedge? (don’t be these guys!) Taesan LCD was a small but profitable South Korean flat-panel TV parts maker with annual revenues of about Won600bn ….but in October, it suffered investment losses of Won80.64bn ($64m) on currency option trading in the first half of the year amid the currency's sharp decline against the dollar. Taesan is not alone. A number of small and mid-sized enterprises in the country are facing heavy losses from currency trades that went the wrong way. http://www.ft.com/cms/s/0/1f8d6840-94d2-11dd-953e-000077b07658.html?nclick_check=1

7. Currency Options (Sept 3, 2008) US $/€ (PSX) STRIKE CALLS PUTS PRICE Sept Oct Sept Oct 1440 1.85 2.50 0.96 1.83 1450 1.30 1.98 1.41 2.30 1460 0.86 1.54 1.96 2.85 1470 0.55 1.17 2.64 3.48 Previous day’s data: vol.: approx 2,500 calls, 3,000 puts US $/pound (PSX) 1800 0.70 1.52 3.15 4.35 1810 0.45 1.20 3.90 5.00 1820 0.27 0.94 4.75 5.75 1830 0.16 0.72 5.59 6.55 Previous day’s data: vol.: approx. 300 calls; 500 puts Source: http://www.phlx.com/market/WorldCurrencyOptions.asp ? , Sept 4, 2008. Bid rates Bid rates

10. Currency Options – how to read this chart? US $/€ (PSX) STRIKE CALLS PUTS PRICE Mar JUN Mar JUN 1440 1.85 2.50 0.96 1.83 1450 1.30 1.98 1.41 2.30 1460 0.86 1.54 1.96 2.85 1470 0.55 1.17 2.64 3.48 Source: http://www.phlx.com/market/WorldCurrencyOptions.asp ? , Sept 4, 2008. Bid rates Premiums: cost of $0.0185 / euro Strike price: you choose which FX rate you want. $1.440 / Euro Plus, you would pay commission per contract (62,500 euros / contract)

16. GE results / Rankings NPV NPV using deposit rate ranking using WACC 7% ranking Forward hedge $ 42,386,767 2 $ 41,367,549 1 Futures hedge $ 42,482,516 3 $ 41,461,275 2 Options hedge $ 43,126,018 4 $ 42,108,347 3 Money market (deposit) hedge $ 42,345,417 1 $ 42,345,417 4

20. Market Exch Rates as of: Sept 2, 2008 Source: Financial Times , September 3, 2008, and http://www.ozforex.com.au/cgi-bin/forwardRates.asp Foreign Currency Exchange Rates (Bid) Canada dollar UK* sterling Europe* euro Switzerland franc Japan yen Spot Rate— (Closing Foreign currency units per US dollar) 1.0625 1.7863 1.4522 1.1090 108.84 Forward Rate—Closing Rates 1 month outright 1.0630 1.7822 1.4498 1.1086 108.652 3 months outright 1.0636 1.7749 1.4454 1.1080 108.281 6 months outright 1.0639 1.7638 1.4391 1.1066 107.716 12 months outright 1.0642 1.7493 1.4283 1.1043 106.453 *(U.S. dollars per foreign currency unit) Spot rates 0.9412 1.7863 1.4522 0.9017 0.00919

21. Market Int Rates as of: Sept 2, 2008 The investment rates quoted herein are on a 350-day coupon yield basis. Source: Financial Times , September 3, 2008 International Money Market Rates (Bid Side) United States dollar England sterling Europe euro Switzerland franc Japan yen Eurocurrency Rate LIBOR overnight 2.17125 5.05563 4.3025 2.05 0.55 1 month 2.48563 5.38125 4.50813 2.25 0.69875 3 months 2.81313 5.74638 4.95188 2.74333 0.89375 6 months 3.11938 5.88750 5.15438 2.88167 0.97125 12 months 3.21438 5.99750 5.32313 3.16667 1.15438 Three-Month Treasury Bill Rate 1.68

22. Currency Futures Open High Low Settle Change High Low Open Interest Sources: Wall Street Journal , September 3, 2008 .9212 JAPAN YEN (CME)—12.5 million yen; $.00 per yen Sept .9200 .9299 .9164 .0010 179,278 Dec .9250 .9345 .9214 .9260 -.0010 23,866 BRITISH POUND (CME)—62,500 pounds; $ per pound Sept 1.8169 1.8170 1.7765 1.7806 -.0350 113,955 Dec 1.8039 1.8039 1.7655 1.7693 -.0346 3,873 EURO/US DOLLAR (CME)—€125,000; $ per € Sept 1.4680 1.4712 1.4456 1.4504 -.0127 151,887 Dec 1.4560 1.4639 1.4389 1.4436 -.0127 7,901 MEXICAN PESO (CME)—MXN 500,000; $ per 10MXN Sept .97000 .97175 .95975 .96250 .0078 88,075 Dec .94925 .95725 .94750 .94975 .0073 18,769 (Sept 2, 2008)

23. Currency Options (Sept 3, 2008) US $/€ (PSX) STRIKE CALLS PUTS PRICE Sept Oct Sept Oct 1440 1.85 2.50 0.96 1.83 1450 1.30 1.98 1.41 2.30 1460 0.86 1.54 1.96 2.85 1470 0.55 1.17 2.64 3.48 Previous day’s data: vol.: approx 2,500 calls, 3,000 puts US $/pound (PSX) 1800 0.70 1.52 3.15 4.35 1810 0.45 1.20 3.90 5.00 1820 0.27 0.94 4.75 5.75 1830 0.16 0.72 5.59 6.55 Previous day’s data: vol.: approx. 300 calls; 500 puts Source: http://www.phlx.com/market/WorldCurrencyOptions.asp ? , Sept 4, 2008. Bid rates Bid rates