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Rammstein STEEL Hedging strategies for exporting to the uk

Rammstein STEEL Hedging strategies for exporting to the uk. Adam Ferguson, Andreas Hjelde & Mike Monaghan . Recommendation and summary. Recommendation: Rammstein Steel should buy a synthetic long put to hedge the market view of down and highly volatile. Summary:

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Rammstein STEEL Hedging strategies for exporting to the uk

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  1. Rammstein STEELHedging strategies for exporting to the uk Adam Ferguson, Andreas Hjelde & Mike Monaghan

  2. Recommendation and summary • Recommendation: Rammstein Steel should buy a synthetic long put to hedge the market view of down and highly volatile. • Summary: Rammstein Steel has entered a long forward contract with Rolls-Royce 29 September 2008 with delivery of high grade steel. Rammstein Steel will receive GBP 100 mill 17 December 2008.

  3. Contents • Company background • Project definition • Value at Risk • Market data • Forecasts • Market outlook • Map of alternatives • Hedging positions

  4. Company background • Rammstein Steel is a successful steel producer specializing in steel manufacturing for the auto industry. • The company has recently entered an agreement with Rolls-Royce in the UK. • 29 September 2008 Rammstein Steel agreed with Rolls-Royce to receive a payment 17 December 2009. • The amount is GBP 100 mill.

  5. Project definition • Our current exposure is a long forward worth GBP 100 mill in revenues which is due 17 December 2008. (+F) • Future 17 December is 1.8132 USD/GBP • $ Underlying exposure is $181,320,000. • Treasury department wants to reduce down side loss on revenue. • Treasury department requires a maximum loss of 5% with a 5% probability (1.645 std dev). • The risk limit is $9,066,000.

  6. VaR for December

  7. Market data

  8. USD/GBP: Recent history and forecast USD/GBP ratio Source: Forecasts.org

  9. Forecast II • Interest rate parity suggests further depreciation of the GBP to the USD Source: Prof. Bodurtha’s Financial Services

  10. Forecast III

  11. Market outlook and trends Economy • The UK economy is suffering from the recession so the Bank of England has decreased and will continue to decrease the interest rate • There is uncertainty about the world economy due to sub prime mortgage woes and the rising current account deficit. As a consequence, Rammstein Steel expects high volatility on the GBP. Recent signs of pound weakness • GBP near record low compared to US dollar. • British Pound has dropped well below $1.85 barrier. • Bank of England reluctant to raise rates despite mild inflationary. fears.

  12. Rammstein’s view

  13. Rammstein’ view is in accordance with market consensus Source: Yahoo Finance

  14. Map of alternatives

  15. Hedging strategies: Current position

  16. Recommended position: Synthetic long put itm Will gain on an estimated depreciation of the GBP, but will lose within risk limit on an appreciation

  17. Alternative I: Forward hegde Will still lose on an estimated downside, but gain on an upside.

  18. Alternative II: Synthetic short straddle Will not gain on high volatility, which is expected

  19. Alternative III: Long straddle Will gain on changes in the price either direction, but we will gain more with a synthetic long put

  20. Recommendation and analysis • Consistent with a market view that expects a depreciation of the British Pound and a highly volatile market; we recommend Rammstein Steel constructs a synthetic long put. It has a maximum downside risk of % 9.04 mill. That is within our loss limit.

  21. Rammstein Steel Advisory Team

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