Osg Corporation

OSG Corporation: Hedging Transaction Exposure (due on February 18, 2013)

Questions to address:

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Explain what gives rise to the currency exposure at OSG Corporation. (1 page) Explain OSG Corp’s current hedging policy and its hedging strategy. (1 page) Identify and explain all non-hedging techniques for OSG Corp. to manage its transaction exposure. (1½ pages) What are the costs of alternatives for reducing short term foreign currency risk? (3 pages) Assume OSG has an account payable of US$3.5 million to a US firm. Use the information provided in Appendix 1 for this accounts payable case of US$3.5 million to a US company. a. Which of the possible hedging methods presented in the case should OSG use if they expect the dollar to depreciate versus the yen during the next three months (the spot will be ¥110.5 per US$)? After calculating the cost of each hedging method, discuss the major strength and weakness of each hedging technique as it applies to OSG Corp. Be specific. b. Which of the possible hedging methods presented in the case should OSG use if they expect the dollar to appreciate versus the yen during the next three months (the spot will be ¥117.2 per US$)?

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Suppose that OSG undertakes the same mandatory hedging policy as S Corporation, the American firm whose minimum forward-cover schedule is shown in Exhibit 10. Apply this schedule to the US$6.7 million account receivable case for OSG and find the expected total endof-period value of the position taken by OSG. OSG is expected to receive a payment of US$6.7 million in three months. The spot rate is ¥115.03 per US$ and the forward rate is ¥116.18 per US$ as shown in Appendix 1. Use Exhibit 10 for minimum forward-cover. Note that the yen is the home currency for OSG. (2 pages) a. What would be the amount of forward cover required? b. If the spot rate in three months was expected to be ¥112 per US$, what would be the amount in US dollars, covered and uncovered? c. Suppose the spot rate in...