Tài chính doanh nghiệp - Multinat corp monte carlo simulations using excel and @risk

#8MultiNat CorpMonte Carlo Simulations using Excel and @RiskL. GattisLearning ObjectivesApply Interest Rate Parity (IRP) and Unbiased Forward Rate (UFR) to forecast exchange ratesUse Bloomberg forex quotes, forwards, volatilities and interest ratesCompute Cashflow at Risk using the CaR Formula and simulationUse simulation software (@Risk) to estimate the effects of forex hedging on cashflowsPreparationDownload Excel FileLaunch Excel – open lab fileLaunch @Risk SoftwareMultiNat Corp. Financial Statement SimulationMultiNat Corp Produces Microprocessor Chips in Australia and sells them in EuropeMNCs only source of revenues come from the sale of chips in Europe which generates eurosA major source of production costs are Australia labor costs which are paid in Australian dollarsMNC has issued euro-denominated debt to hedge their euro revenues and is considering the use of options or forwards to hedge against an appreciation of Australian dollar.MNC FinancialsForex ForecastsEURUSDUse the spot price and forward points to obtain the outright forward priceAssume the forward price is an unbiased predictor of future spot rates (UFR: Unbiased Forward Rate)EUR revenue is partially hedged by the issuance of euro-denominated debtAUDUSDUse Interest Rate Parity (IRP) to forecast exchange rateAUD is hedged with forwards and/or optionsAUD IRP ForecastWhat is the IRP expected appreciation of the AUD if U.S. and Australian 1-year interest rates are .21% and 4.73%, respectively?EUR: Market-Based Forecast (Unbiased Forward Rate)Spot = 1.4044 + Fwd Pts (-.0087) = 1.3957Base Case FCF ForecastMNC’s AUD CaRWhat is MNC’s 1-year, 95% CaR?σ = Black-Scholes 1-yr Implied Vol; T = 1 year;V = ?????; Z = ?????CaR = VZσT.5Monte Carlo SimulationWe will now run a cashflow simulation to see the distribution of possible CFs. We will then evalulate alternative AUD hedging strategies using the simulation.Financial Simulation Process1. Create a model that estimates a future outcome (e.g., CF) which has a stochastic variable such as asset returnStochastic variables are those in which the future value is uncertain (non-deterministic) – i.e., more than one possible outcome2. Specifying the distribution of the stochastic variablesE.g., The Appreciation of the AUDUSDDistribution: Normal; Mean = IRP Value, σ = B.S. Implied Vol3. Simulate many possible outcomes by randomly sampling from the specified distribution E.g., sample 10,000 possible values for AUD appreciation4. Evaluate the distribution of the outcomeE.g., mean, standard deviation, confidence intervals12@Risk Application Steps1. Specify Input (AUD Appreciation) by defining a distribution for AUD appreciationNormal Distribution, mean, sd2. Specify OutputFree Cashflows3. Run Simulation4. Evaluate Results1. Define Distribution for AUD Appreciation2. Add Output3. Start Simulation4. Evaluate ResultsThe 1-yr, 95%,CaR in this case is the mean FCF – 5% tail701- 183 = 518KEvaluate ResultsWhat are 99% Probability level of cashflows? (one-tail, two-tail)What are 90% Probability level of cashflows?What is the probability cash flows are < 0?Copy ResultsForward and Option CoverageAUD Hedging AlternativesLong AUD ForwardCost = 0Payoff = (St– F)xQBuy AUD CallCost = premium x QPayoff = Max (St-X, 0)xQAssignmentTotal: One Page (Table and Essay)Complete Simulation Results, print Spreadsheet from prior slideWrite a half-page essay (Single Spaced)If you were the CFO, discuss which hedging plan you would choose for MNCNo hedgingForward hedging (partial coverage or 100%)Option Hedging (partial coverage or 100%)Mix of Options and ForwardsWhat other factors would influence your decisions.