Treasury and Advanced Risk Management

SECTION B: ADVISORY REPORT This question is worth 25 marks. Scenario: Ceres Global Agri (Ceres) is a multinational agricultural cooperative based in the Eurozone, specializing in the export of high-yield crop seeds and the import of specialized farming machinery. Ceres operates a centralized treasury department. Ceres has recently secured a major contract in Brazil and expects a receipt of BRL 50 million in exactly six months. The treasury team is concerned about the depreciation of the Brazilian Real (BRL) against the Euro (EUR). Separately, Ceres has just drawn down a USD 20 million floating-rate loan to finance a new logistics hub in the United States. The interest is payable semi-annually at SOFR + 200 basis points (2.0%). The current SOFR is 4.0%, but the treasury team fears US interest rates will rise sharply over the next year. Exhibit 1: Foreign Exchange Data (EUR/BRL) Spot rate: BRL 5.2010 - 5.2550 per EUR Six-month forward rate: BRL 5.3520 - 5.4240 per EUR Over-the-counter (OTC) Currency Options (European style, maturity in 6 months): - Option to sell BRL (Put BRL / Call EUR): Strike Price BRL 5.3000 / EUR. Premium: EUR 0.015 per BRL 100. - Option to buy BRL (Call BRL / Put EUR): Strike Price BRL 5.3000 / EUR. Premium: EUR 0.018 per BRL 100. Exhibit 2: Interest Rate Hedging Data Ceres's bank has offered two hedging instruments for the USD 20 million loan for the next 12 months: Instrument 1: An Interest Rate Swap where Ceres pays a fixed rate of 4.8% and receives SOFR. Instrument 2: An Interest Rate Cap on SOFR with a strike rate of 4.5%. The premium for the cap is 0.4% of the principal amount, payable upfront. Requirements: (a) Evaluate the two hedging strategies for the BRL 50 million receipt (Forward Market Hedge vs. Currency Options). Calculate the net Euro receipts under both methods, assuming the spot rate in six months is BRL 5.5000 / EUR. Recommend the most appropriate strategy. (12 marks) (b) Advise Ceres on hedging the USD 20 million floating-rate loan. Calculate the effective annual interest cost (in USD) under both the Interest Rate Swap and the Interest Rate Cap, assuming SOFR rises to 5.5% in six months and remains there for the rest of the year. (8 marks) (c) Discuss the advantages and potential drawbacks of Ceres operating a centralized treasury department to manage these global financial risks. (5 marks)