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.
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% | $7,712,101.96 | ||||||
| % Difference from baseline | -32% |
Currency adjustment clause with a 5% upper and lower bound, using the current spot rate as reference rate
| Project Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |
| Calendar Year | RATE | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net income | 3121211 | 4599182 | 4894776 | 4894776 | 4894776 | |||
| Add: Depreciation | 949360 | 949360 | 949360 | 949360 | 949360 | |||
| Cash Flows | 4070571 | 5548542 | 5844136 | 5844136 | 5844136 | |||
| Currency Adjustment Clause | ||||||||
| b) a 5% appreciation per year | 5% | |||||||
| Expected BRL rate (BRL/$) | 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% |
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