The aim of this assignment is to evaluate the foreign exchange hedging strategy of Carter + Smith Company that manages a project in Colombia. This is group assignment and each group is expected to make one submission
Deliverables:
- Analysis file (Excel file, please make sure your excel file title has your group name in it) (5 points)
- A presentation that will be presented in class ( Presentation file, please make sure your presentation file title has your group name in it) (5 points)
Please follow the steps below for your analysis and presentation
• Buy the Carter + Smith: Exchange Rate Risk Hedges case from Harvard Business Publishing website hbsp.harvard.edu by creating a student account if you do not have an account already.
• There is a HBS course pack created for this course with the following link: https://hbsp.harvard.edu/import/905081
• Title: “Carter + Smith: Exchange Rate Risk Hedges” by Maximiliano Gonzalez, Juan Pablo Davila, Product number: AN0077
• Do the analysis required to answer the following questions
Questions
- Explain Carter + Smith Company business and sources of its foreign currency exchange rate risk. You can analyze Annexes 2 and 3.
- Choose one of the contracts from Annex 3 and explain the dynamics of the current hedging with NDFs with calculating profits and losses in spot and forward markets and the implied exchange rate with this particular contract.
- Evaluate the coverage proposed by Hector with the information in Exhibits 4 and 5 and assuming that the exchange rate remains at $2,400 pesos per dollar.
- What happens if the board decides to close the coverages and assumes loses? Calculate the total realized loss using a 10% discount rate.
- What would happened if the exchange rate revalued against peso? What would happen if the dollar is devalued against the peso? Calculate your losses and profits
- How should Hector present the pros and cons of the two strategies; closing the hedge versus continuing the hedge?
Sample Solution