| Course | FIN-3340 International Finance |
|---|---|
| Module | Module 3 |
| Paper type | Written assignment 3: foreign exchange instruments |
| Length | About 560 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3340 Module 3
Locking In or Keeping the Upside: Currency Forwards and Options on a Peso Receivable
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3340: International Finance
Mentor Name
Month Day, Year
Locking In or Keeping the Upside: Currency Forwards and Options on a Peso Receivable
The Exposure
Spot rate: CLP 950 per dollar. Chilean 180-day interest rate: 7.6 percent a year. U.S. 180-day rate: 4.4 percent a year. If the peso weakens before payment, Raritan receives fewer dollars. Firms that used currency derivatives carried higher market values, on average, than similar firms that did not, according to Allayannis and Weston (2001).
Forward Contracts
A forward contract obligates the firm to exchange a specified amount of currency at an agreed rate on a future date. Banks set forward rates by interest rate parity (Eiteman et al., 2022):
F = S × (1 + iCLP × 180/360) / (1 + iUSD × 180/360) = 950 × 1.038 / 1.022 = CLP 964.87 per dollar.
The peso trades at a forward discount because peso interest rates are higher. Selling CLP 1.14 billion forward guarantees $1,140,000,000 / 964.87 = $1,181,503 in 180 days, whatever happens to the spot rate. Forwards are tailored to the exact amount and date, require no upfront payment and are arranged with the firm's bank, though the firm takes on the bank's credit risk and may need a credit line to trade.
Futures Contracts
Currency futures are standardized, exchange-traded versions of forwards, with fixed contract sizes and delivery dates, daily marking to market and margin deposits, and a clearinghouse that removes counterparty risk. For a firm hedging one specific receivable, futures are less convenient: the contract size and date rarely match the exposure, daily settlement creates cash flows before the receivable is paid and peso futures trade far less actively than major currencies. Raritan's bank forward fits better.
Currency Options
With a peso put, Raritan may sell pesos at the strike but need not. Say Raritan buys a six-month peso put struck at CLP 960 per dollar for $17,812, or 1.5 percent of the amount; carried for 180 days at the U.S. interest rate, the premium grows to about $18,204 by expiration. The put guarantees at least $1,140,000,000 / 960 = $1,187,500 before its cost, a net floor of $1,169,296, while letting Raritan benefit if the peso strengthens.
Comparing the Results
The forward gives certainty. The option sets a floor slightly below the forward, about $12,200 lower, in exchange for upside if the peso strengthens; it beats the forward only if the peso ends stronger than about 950. Remaining unhedged offers the most upside and the deepest downside, a loss of more than $114,000 relative to today's value if the peso weakens to 1,050.
| Spot rate in 180 days, CLP per $ | Unhedged | Forward | Put option, net of premium |
|---|---|---|---|
| 900 (peso stronger) | $1,266,667 | $1,181,503 | $1,248,462 |
| 950 (unchanged) | $1,200,000 | $1,181,503 | $1,181,796 |
| 1,000 (peso weaker) | $1,140,000 | $1,181,503 | $1,169,296 |
| 1,050 (much weaker) | $1,085,714 | $1,181,503 | $1,169,296 |
Which Instrument?
The choice depends on Raritan's view and its tolerance for risk. If the sale is priced on a thin margin and the firm cannot afford a loss, the forward's certainty is worth more than the option's upside. If the firm wants protection but believes the peso may strengthen, perhaps because copper prices are rising, the option's floor and upside justify its premium. Froot et al. (1993) tie the value of hedging to protecting the cash a firm will need for investment; a small exporter paying for its own growth should therefore lock in most of the receivable.
References
Allayannis, G., & Weston, J. P. (2001). The use of foreign currency derivatives and firm market value. Review of Financial Studies, 14(1), 243-276. https://doi.org/10.1093/rfs/14.1.243
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2022). Multinational business finance (16th ed.). Pearson.
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance, 48(5), 1629-1658. https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
FIN 3340 Module 3 instructions, in plain terms
Forwards, futures and options end the midterm material; the proctored exam is two closed-book hours of short essays and problems on Modules 1 to 3. Expect questions on forwards, futures and options, how forward rates are set and how hedged and unhedged outcomes compare at different future spot rates. Allayannis and Weston's evidence that hedging firms are valued more highly adds context. The rates and premium here are illustrative. Expect to compare forwards, futures and options for hedging a specific foreign currency receivable or payable. Some versions add a money market hedge for comparison.
How this FIN 3340 Module 3 example is built
The paper states the exposure with every rate used. The forward section derives the forward rate from interest rate parity with the formula shown and computes the guaranteed dollar amount. The futures section explains why standardized contracts suit this exposure less well. The options section prices a put, including the financing cost of its premium, and computes its floor. A table compares unhedged, forward and option outcomes at four spot rates, and the closing section ties the choice to the firm's margin and research on why hedging adds value. Each hedge is shown at several future exchange rates so its protection and cost are visible. The recommendation names the hedge and the reason in one sentence.
Reading the FIN 3340 Module 3 grading rubric
Comparing the peso hedges at common spot rates is the heart of this grade. Mentors look for correct forward rate and payoff calculations, accurate explanations of how forwards, futures and options differ and a comparison that leads to a reasoned choice. Including the option premium's financing cost and the break-even spot rate between instruments shows the precision the midterm problems also expect. References to the text and research in APA format are required. Mentors give credit for correct payoffs and for a recommendation that matches the firm's view and risk tolerance. A table comparing the hedges at several rates supports the recommendation. Hedging answers that compare the forward, the money market hedge and the option at several possible spot rates, and that recommend one for stated reasons, earn the most.
FIN 3340 Module 3 help: mistakes that cost marks
Instrument problems lose points for inverting the interest rate parity formula, for comparing an option with a forward without subtracting the premium and for recommending futures for a tailored exposure without noting the mismatch. Write the quotation convention beside every rate. Derive the forward from parity. Include the premium, and its financing, in option outcomes. Test every hedge against one common set of future spot rates. A free first sample of your own FIN-3340 Module 3 problems is available on request. Include the option premium when comparing an option hedge with a forward. State the contract size and maturity for any futures contract you use.
Write yours, or have the desk draft it
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FIN 3340 Module 3 questions, answered
Where can I find a free FIN 3340 Module 3 sample paper?
The deck oven exporter problem set above derives a peso forward rate, compares forwards and futures and tabulates a forward against a put option at four future spot rates.
How is a forward exchange rate calculated?
By multiplying the spot rate by one plus the foreign interest rate over the period, divided by one plus the domestic rate.
What is the difference between currency forwards and futures?
Forwards are private, tailored contracts with a bank; futures are standardized, exchange-traded and marked to market daily.
When is a currency option better than a forward?
When the firm wants protection against loss but also wants to benefit if the currency moves in its favor, and will pay a premium for that.
What is a forward discount?
When a currency's forward rate is weaker than its spot rate, usually because its interest rates are higher.