Question

Money Market Versus Put Option Hedge. Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5% when investing funds and 7% when borrowing funds. The one-year Swiss interest rate is 9% when investing funds, and 11% when borrowing funds. The spot rate of the Swiss franc is $.80. Narto expects that the spot rate of the Swiss franc will be $.75 in one year. There is a put option available on Swiss francs with an exercise price of $.79 and a premium of $.02.

a)Determine the amount of dollars that Narto Co. will receive at the end of one year if it implements a money market hedge.

b)Determine the amount of dollars that Narto Co. expects to receive at the end of one year (after accounting for the option premium) if it implements a put option hedge.

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Dr General File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste Format Painter B I U - D A Clipboard Font 10525 Wrap Text Merge & Center $ - % 8. Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells ILIKILIM IN O P Q R S 508 509 510 AMOUNT RECEIVABLE UNDER MONEY MARKET HEDGE step 1 : borrow swiss franc today Amount of swiss franc to be borrowed = 500000 / 1.11 511 450450.45 512 513 step 2: convert this 450450.45 swiss franc to dollars today at spot rate dollar received today = 450450.45 x 0.8 = 360360.36 514 515 516 step 3: invest in US @5% After a year, amount receivable = 360360.36 *(1+0.05) = 517 378378.38 518 519 520 step 4: you have to pay swiss franc 500000 after a year which is exactly the same you will receive from your party So 378378.78 received without any risk 521 378378.38 522 523 AMOUNT RECEIVABLE UNDER MONEY MARKET HEDGE = 378378.38 524 525 526 AMOUNT RECEIVABLE UNDER PUT OPTION K M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: IP17 cap stru WACC BOJ 120% RESI el O Rea DO 4 * 4 OENG 22-11-2019

ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = D A Wrap Text Merge Merge & Center Center m Find & E Copy Paste Format Painter Clipboard B I U - SF $ - % % 4:0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill 2 Sort & 2 Clear Filter Editing Select Font Alignment Number Cells IK543 LIJIKILIMIN 10 IP IQ IR 524 525 AMOUNT RECEIVABLE UNDER PUT OPTION AS WE ARE HAVING RECEIVABLES WE HAVE TO GO FOR PUT OPTION 10000 [500000 x $0.02] PREMIUM PAYABLE = [AMOUNT RECEIVABLE X PREMIUM] 526 527 528 529 530 531 532 533 534 535 536 537 NOW MINIMUM AMOUNT RECEIVABLE IN ANY CONDITION = 395000 (500000 X $0.79] NET AMOUNT RECEIVABLE = 385000 [395000 - 10000] 538 539 540 541 542 543 544 HI Rea M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: 130 cap stru WACC BO! 120% RESI el - -_+ ...Bag OENG 21-11-2019