Question

Wheldon Wheels Inc. (WW) is a US-based manufacturer that exports car parts to Taiwan. WW expects to receive 20,000,000 Taiwan dollars in 90 days. Suppose WW decides to use the option market to hedge. Which of the following should WW do? Assume that all contracts are for TWD, quoted in terms of USD (i.e., in American terms).

Answer 1

Answer:

WW should enter into a Futures contract

Explanation:

As WW  exports cars to Taiwan when Taiwan pays the money depends on the exchange at the time of payment so WW must enter into a futures contract to protect themselves should the exchange fall. Suppose the exchange rate was USD is 1.8 Taiwan dollar and WW enter purchase a foward contract to hedge if  in 90 days the exchange rate falls to 1 USD : 1.4 Taiwan dollars WW will not be affected they will still receive 1.8 in this case the full 20 000 000 in Taiwan Dollars will be received

Answer 2

Answer: Enter into a futures contract

Explanation:

Wheldon Wheels inc. operates in the United states, The company exports car Parts to Taiwan which means they do business with companies in Taiwan. The amount that Wheldon Wheels inc receives when they export car parts depends on the Exchange rate between a US dollar and Taiwan Dollar.

Exchange rates between currencies fluctuates every day in the market which presents a problem of uncertainty because when exchange rate changes the value of the transaction changes and that will increase or decrease a company's profits in each transaction.

Wheldon Wheels Expects to receive 20 000 000 Taiwan dollars in 90 days, since the company is in The united states the amount of 20 000 000 of Taiwan Dollars Receivable will need to be converted into US dollars. The Problem is, The exchange rate may decrease or increase in the next 90 days which will affect how much Wheldon Wheels receives in dollars.

Wheldon Wheels inc may Protect them selves against Exchange rate Fluctuations by entering into A Future Contracts with a Bank or exchange dealer. Futures Contract will provide Wheldon Wheels inc with an opportunity to sell 20 000 000 Taiwan Dollars in 90 days at a fixed predetermined exchange rate. The Dealer Promises to Buy 20 000 000 Taiwan Dollars in 90 days at a Predetermined Fixed exchange rate.

example

suppose the (WW) enters into a Futures contract to sell 20 000 000 Taiwan Dollar in 90 days at an Fixed exchange rate of $1 = 1.5 Taiwan dollar, if the market exchange rate in 90 days is $1 =  1.3 Taiwan dollar Wheldon Wheels inc would be protected. The Exchange rate for the 20 000 000 Taiwan Dollar transaction would remain at $1 = 1.5 Taiwan dollar