Ealing with Foreign Currency: A Case Analysis

Write an Essay explaining the best option to take on a specific case for Case Analysis.

Dealing with Foreign Currency: A Case Analysis

Suppose you are Swedish and are considering graduate study in the United States. It is April and you have been admitted into a two-year master s program at a good school. Your tuition per semester will be $5,000 and living expenses will amount to $1,000 per month. (You, therefore, estimate needing a total of $22,000 per year.) You are assured by the college that you will be able to find on-campus work to pay for your living expenses. You, therefore, need only worry about paying tuition. It is now July. You applied for and just received a tuition scholarship from the Swedish government for the amount of SKrl00, 000 per annum for two years. The current exchange rate between the dollar and the krone is 10SKr/$. You are obviously ecstatic about having won the award. You are told that you will get the money for the first year in September.

” What risks do you face? Upon inquiry at your bank, you find that the forward price for a September contract to buy dollars is 10SKr per dollar. How might you hedge your exchange-rate risk for the first year?
” If in September the market rate for the dollar turns out to be 9.5SKr/$, would you gain or lose on the forward contract? Does this mean that because you are worse off you shouldnt have entered the contract in the first place?
It is still July. The representative at the Swedish government award office is offering you a set of choices for how you can be paid your award: You could get SKr100, 000 krone this coming September and the same amount the following September. Or, you could avoid the exchange-rate risk this coming year by being paid $5,000 per semester for the coming year (get paid in September and February) and then you would have the option to decide next July how you wish to be paid for the following year. In addition, you know the following: The forward price of the dollar for a September contract is 10SKr/$ and the U.S. risk-free interest rate is 5% per annum.

” Which payment option would you choose and why?