Nodal Logistics and CUSTO Brazil Case Solution
- Discuss the following hedging methods assuming
(a) The exchange rate remains constant
(b) A 5% appreciation per year
(c) A 5% depreciation per year
Calculate for each alternative the present value of the hedged cash flows (NI + D) for the year 2009 – 2013 (see Exhibit 2) using a 10% discount rate.
The company, with the help of the above given hedging strategy, can minimize its risks to minimal.
Remain un-hedged
| Project Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Calendar Year | RATE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net income | 3121211 | 4599182 | 4894776 | 4894776 | 4894776 | |||
| Add: Depreciation | 949,360 | 949,360 | 949,360 | 949,360 | 949,360 | |||
| Cash Flows | 4,070,571 | 5,548,542 | 5,844,136 | 5,844,136 | 5,844,136 | |||
| Remain Unhedged | ||||||||
| a) the exchange rate remains constant | ||||||||
| Fixed BRL rate (BRL/$) | 1.7950 | 1.7950 | 1.7950 | 1.7950 | 1.7950 | |||
| Cash Flow proceeds (US $) | 2267727.577 | 3091109.749 | 3255786.072 | 3255786.072 | 3255786.072 | |||
| Baseline Present Value of the un-hedged Cash flow(US $) | 10% | $11,307,659.64 |
Forward contracts
| Project Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Calendar Year | RATE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net income | 3121211 | 4599182 | 4894776 | 4894776 | 4894776 | |||
| Add: Depreciation | 949360 | 949360 | 949360 | 949360 | 949360 | |||
| Cash Flows | 4070571 | 5548542 | 5844136 | 5844136 | 5844136 | |||
| FORWARD CONTRACT | ||||||||
| Forward Rate (BRL/$) | 2.0141 | 2.1436 | 2.2979 | 2.4526 | 2.5 | |||
| Cash Flow proceeds (US $) | 2021037.2 | 2588422.3 | 2543250.8 | 2382832.9 | 2337654.4 | |||
| Present Value (US $) | 10% | $8,966,286.87 | ||||||
| % Difference from the Baseline Present Value (US $) | -21% |
Put options
| Project Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Calendar Year | RATE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net income | 3121211 | 4599182 | 4894776 | 4894776 | 4894776 | |||
| Add: Depreciation | 949360 | 949360 | 949360 | 949360 | 949360 | |||
| Cash Flows | 4070571 | 5548542 | 5844136 | 5844136 | 5844136 | |||
| PUT OPTION | ||||||||
| Put option strike rate (BRL/$) | 2.0141 | 2.1436 | 2.2979 | 2.4526 | 2.5000 | |||
| Put option premium ($/BRL) | 0.0486 | 0.0591 | 0.062 | 0.0636 | 0.0764 | |||
| Cash flow exposure (BRL) | 4070571 | 5548542 | 5844136 | 5844136 | 5844136 | |||
| Put option premium ($, total) | 197829.7506 | 327918.8322 | 362336.432 | 371687.0496 | 446491.9904 | |||
| Gross cash flow proceeds (US$) | 2021037.188 | 2588422.28 | 2543250.79 | 2382832.912 | 2337654.4 | |||
| Less option premium (no interest) | 197829.7506 | 327918.8322 | 362336.432 | 371687.0496 | 446491.9904 | |||
| Net cash flow proceeds (US$) | 1823207.437 | 2260503.448 | 2180914.36 | 2011145.862 | 1891162.41 | |||
| Present value @ | 10% | $7,712,101.96 | ||||||
| % Difference from baseline | -32% |
CURRENCY ADJUSTMENT CLAUSE
| Project Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Calendar Year | RATE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net income | 3121211 | 4599182 | 4894776 | 4894776 | 4894776 | |||
| Add: Depreciation | 949360 | 949360 | 949360 | 949360 | 949360 | |||
| Cash Flows | 4070571 | 5548542 | 5844136 | 5844136 | 5844136 | |||
| Currency Adjustment Clause | ||||||||
| b) a 5% appreciation per year | 5% | |||||||
| Expected BRL rate (BRL/$) | 95% | 1.7950 | 1.70525 | 1.61999 | 1.53899 | 1.46204 | 1.38894 | 1.31949 |
| Cash Flow proceeds (US $) | 2512718 | 3605318 | 3997251 | 4207633 | 4429087 | |||
| Present Value (US $) | 10% | $13,891,069.03 | ||||||
| % Difference from the Baseline Present Value (US $) | 23% | |||||||
| c) a 5% depreciation per year | -5% | |||||||
| Expected BRL rate (BRL/$) | 1.7950 | 1.88475 | 1.97899 | 2.07794 | 2.18183 | 2.29093 | 2.40547 | |
| Cash Flow proceeds (US $) | 2056896 | 2670217 | 2678543 | 2550994 | 2429518 | |||
| Present Value (US $) | 10% | $9,340,027.48 | ||||||
| % Difference from the Baseline Present Value (US $) | -17% |
LOCAL CURRENCY DEBT FINANCING
| Project Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Calendar Year | RATE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| EBIT | 4,106,856 | 6,051,555 | 6,440,494 | 6,440,494 | 6,440,494 | |||
| Less: Interest Expense | 15% | 2700000 | 2700000 | 2700000 | 2700000 | 2700000 | ||
| EBT | 1,406,856 | 3,351,555 | 3,740,494 | 3,740,494 | 3,740,494 | |||
| Tax | 24% | 337645.44 | 804373.2 | 897718.56 | 897718.56 | 897718.56 | ||
| Net Income | 1,069,211 | 2,547,182 | 2,842,775 | 2,842,775 | 2,842,775 | |||
| Add: Depreciation | 949,360 | 949,360 | 949,360 | 949,360 | 949,360 | |||
| Cash Flows | 2,018,571 | 3,496,542 | 3,792,135 | 3,792,135 | 3,792,135 | |||
| Fixed Exchange Rate | 1.7950 | 1.7950 | 1.7950 | 1.7950 | 1.7950 | |||
| Cash flow Proceed | 1124551.844 | 1947934.15 | 2112610.273 | 2112610.273 | 2112610.273 | |||
| Present Value | 10% | $6,974,124.17 | ||||||
| % Difference from the Baseline Present Value (US $) | -38% |
- Present a summary of the outcomes (present value) for the various hedging alternatives. Which among the various alternatives would you recommend? Explain your preference and also why not the other alternatives.
With the proper analysis of each of the above hedging alternative with their merits as well as demerits some conclusion can be made for Mr. John in order to minimize his risk efficiently in order to gain in the future....................
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