GROUP ASSIGNMENT 1 (DUE DATE October 25, 2019 – no extension should be expected)

No of group members (Maximum 3) – Form group on your own discretion

Maximum marks 20

Roleen Co is a large, unlisted company based in Korea and its local currency is the Koreaese (KEE). It
manufactures industrial equipment and parts. The company’s boRRD of directors (BoD) believes that
the strategy of overseas investments, through subsidiary companies, branches and joint ventures,
has directly led to the company’s substantial increase in value in the past few years.

Roleen Co’s BoD is considering investing in a project based in Rolena, whose currency is the Rolena
Rand (RRD). It believes that the project will be an important addition to the company’s portfolio of
investments, because Roleen Co does not currently have a significant presence in the part of the
world where Rolena is located. It is intended that the project will commence in one year’s time.
Details of the project are given below.

The company is due to receive the proceeds from the sale of a subsidiary company in six months.
Roleen Co has a centralised treasury department, which hedges expected future cash flows.

The agreed proceeds from the sale of the subsidiary company receivable in nine months’ time are
Euro (EUR) 120 million. The BoD is concerned about a negative fluctuation in EUR/KEE rate between
now and in nine months when the EUR 120 million will be received. Therefore, it has asked Roleen
Co’s treasury department to hedge the expected receipt using one of currency forwards or currency
futures. Roleen Co’s treasury department has obtained the following information:

KEE per EUR 1 RRD per EUR 1

Spot 139.4 - 135.2 100.6 – 98.7
nine months 134.6 - 131.3
forward rate
Currency futures (contract size EUR 125,000, quotation KEE per EUR 1)

Four months expiry 130.9

Ten months expiry 128.2

REQUIRED:

1. Should the centralized treasury function be used in case of a local company having multiple
regional offices.
2. Estimates the expected amount of KEE receivable under each hedge choice and the
additional debt finance needed to fund the Rolena project for the preferred hedge choice if
the total investment required for the project is RRD 10,000m;
3. Discuss the advantages and drawbacks of exchange traded option contracts compared with
over-the-counter options.