Ocean Drilling Inc Case Study Analysis
The net present value of the Japanese bid proposal is calculated by locking the future exchange rate, calculated as 244.5. The Net present value with the use of the forward exchange hedging strategy is calculated as $64505331, which means that the company would be able to take advantage of forward contract hedging strategy.
Go for French bid, and use money market hedging.
The company has the option of going for the French bid, it could use the money market hedging strategy under which the company would be able to borrow the amount of loan in the homecurrency.Afterwards, such proceeds tend to be converted into the foreign currency for the short term investment with the use of the short term investment rates. By fixing the future rate; the money market hedging strategy eliminates the downside risk exposure and provides the flexibility with respect to the amount of money to be recovered (insight, 2006).
By using the information provided in the case; the dollar value of the money market hedge for the French bid is calculated as $17595332,using the short term interest rate on the ground that the company is looking for short term investment. The dollar value of the money market hedge,which means that the company would save itself from the uncertaintyassociated with the cost of the future transaction.
Choose the hedging strategy, and discuss what would work best
After taking into consideration the money market hedging technique and the forward contract exchange rate hedging strategy; the company is recommended to opt for the forward contract due to the fact that the money market hedging is more complicated to organize as compared to the forward contract hedging, as it does not provide any the opportunity to get benefit from the favorable and desirable movement in the exchange rates. It is relatively expensive whereas the forward contract is of flexible nature and could be easily customized in accordance with the needs of the parties. Additionally, it is relatively straightforward both inorganizing as well ascomprehending. In consideration of the evaluation of both the proposals presented to the company,; Ocean Drilling Inc. is recommended to accept the Japanese bid based on the higher net present value in the forthcoming years and hedge the exchange risk in relation to the changes to the value of these currencies, using the forward contract.................................
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