A forward contract is an agreement between two counter parties to exchange one asset for another at a specified time in the future. An advantage of the currency futures hedge is they trade on an organized exchange and delivery is guaranteed via the clearinghouse.
With the forward contract, favorable movements in the exchange rates cannot be recognized. Based on the Exhibits within the case, the trends have shown that the exchange rate is more favorable.
If that were the case, Merton should remain unhedged. Conclusion Martin has various alternatives to consider if she cannot enjoy options. The advantages of the forward contract are the value of the payable becomes fixed at the time of the order and the initial outlay is minimal to zero.
There would be advantages to the company if it decided not the hedge. Merton electronics corporation Points of Hedging Merton should hedge its cash flows when orders are placed and it should match its hedging with its exposure.
Assuming if she enters the European market, she has to buy a call option to cover the difference of higher spot Merton electronics corporation in future with the strike price.
The outcome of a money market hedge is determined by the interest rate differentials. In this case, Merton is suffering from currency risk on payable accounts used to finance imports from Japanese suppliers. The firm could also become overly leveraged which could cause an imbalance in their optimal capital structure.
Transaction exposure is the actual or real gain or loss in the exchange of one currency for another. However, this loan would allow the company to take advantage of currency swings and would limit its downside risk. However, currency options are just that options they are not obligations to fulfill contracts.
The main disadvantage is the need to maintain a margin account because the contracts are marked to market on a daily basis. These contracts would only be exercised if the currency rates were not favorable.
Currency risk is simply the degree to which the business is affected both positively and negatively by changes in exchange rates. These exchange rate fluctuations are also real in regard to gains and losses but they are long term in nature.
The fourth possible hedge is a currency option hedge, which uses an option contract to hedge the changes in exchange rates. Price of the options cover six elements forward rate, current rate of spot, fluctuation in the currency that is underlying, local and foreign rate of interest and strike price.
This case will present the different options and trade-offs between the different types of currency hedges. In this case, Merton Electronics is facing transaction exposure in regard to the payable to the Japanese firm for the goods that were ordered in January.
The calculations can be found in Appendix. Merton Electronics Corporation was founded in as a distributor of electrical and electronics products for consumer and institutional products.
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The contract is binding and the terms are likely not able to be changed after the contract has been signed. It imports a wide range of electronic goods from personal computers to cassettes from Japan and Taiwan, which are then distributed to retail firms and dealers. You can choose whether to allow people to download your original PowerPoint presentations and photo slideshows for a fee or free or not at all.
The major disadvantage in using the currency options is the premiums paid to acquire the options. Exchange option Merton can also use currency option where she has an option not an obligation to translate cash at maturity of option however she needs to further consider in which market she has to enter in.
Unlike a forward, the company does not have to take delivery; it can simply sell the future. With a majority of its components coming from Japan and Taiwan, there is a definite need for the company to hedge. The calculations can be found in Appendix 4.
If interest rate parity holds, and transaction costs are ignored, the forward hedge and the money market hedge will yield identical results. Translation exposure is pure accounting exposure. In case you experience difficulties with writing a well structured and accurately composed paper on MErton Electronics, we are here to assist you.
The most appropriate time for Merton to exercise their hedging strategy is at the time that the order has been placed.Merton Electronics Corporation Case Solution, Merton Electronics Corporation Case Solution Leading and lagging Currently,company uses spot price of the last day of themonth, if the meeting expects tha.
In FebruaryMerton Electronics was reviewing its currency risk position. Its principal foreign suppliers were Japanese and fluctuations of the dollar/yen exchange rate during the past years seemed to have had a serious impact on costs and earnings.
Lucas Michael Beiswenger's Homepage > Merton Electronics Merton Electronics Case. Lucas Beiswenger. Timothy Check. Yuri Gnip. Amelia Huynh. Stephanie Samuel. William Stromeyer. February 24, Dr. Merouane Lakehal-Ayat. Finance in a Global Environment. Introduction. Merton is a company that is exposed to a great deal of.
Merton Electronic Corporation Question 1 Transaction Exposure is the risk faced by companies involved in global or international trade as a result of fluctuations in the currency exchange rate.
Merton Electronics Corporation Case Solution, Merton Electronics Corporation Case Solution This Case is about Finance published: 01 Jan In FebruaryMerton Electronic devices was evaluating i.
Merton Electronics Corporation About company-Since its founding in by Thomas Merton, Merton Electronics had been a distributor for GEC, a large manufacturer of electrical and electronics products for consumer and institutional market.Download