PLEASE SHOW WORK BY HAND
Kansas Corp., an American company, has a payment of €5 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $5,555,556, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $100,000 for a one-year call option on €5 million at an exchange rate of 0.88 €/$.
a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas’s net dollar cost for the payable under each strategy?
b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas’s net dollar cost for the payable under each strategy?
PLEASE SHOW WORK BY HAND Kansas Corp., an American company, has a payment of €5 million...
Kansas Corp., an American company, has a payment of €5 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $5,555,556, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strat- egies. Strategy 1 is to buy €5 million forward today at...
Kansas Corp., an American company, has a payment of €5.9 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $6,555,556, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5.9 million forward today at a...
Norton Corp. sold a computer system to a customer in the UK and billed £20 million receivable in one year. Norton would like to control for the exchange rate risk. The current spot exchange rate is $1.30/£ and one-year forward exchange rate is $1.27/£ at the moment. Norton can buy a one-year put option on £20 million with a strike price of $1.32/£ for a premium of $0.02 per pound. It can also buy a one-year call option on £20...
Hedging Decision. Indiana Company expects to receive 5 million euros in one year from exports. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the following strategies: a) unhedged strategy b)money market hedge c)option hedge The spot rate of the euro as of today is $1.10. Interest rate parity exists. Indiana Company uses the forward rate as a predictor of the future...
A U.S. company has a ¥750 million payable due in one year to a bank in Japan. The current spot rate S($/¥) = $0.0086/ ¥ and the one - year forward rate F 360 ($/¥)= $0.0092/¥. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a. How to implement a hedge using a forward contract? Compute the guaranteed dollar payment in one year using the forward hedge. b. How to implement a money...
A U.S. company has a ¥50 million payable due in one year to a bank in Japan. The current spot rate S($/¥) = $0.0086/ ¥ and the one-year forward rate F360($/ ¥) = $0.0092/ ¥. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a. How to implement a hedge using a forward contract? Compute the guaranteed dollar payment in one year using the forward hedge. b. How to implement a money market...
General Electric sold a machine system to a customer in the UK and billed £30 million payable in one year. GE is concerned with the pound proceeds from international sales and would like to control exchange rate risk. The current spot exchange rate is $1.29/£ and one-year forward exchange rate is $1.27/£ at the moment. GE can buy a one-year put option on £30 million with a strike price of $1.32/£ for a premium of $0.02 per pound. It can...
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable in one year. The current spot rate is ¥124/$ and the one-year forward rate is 110¥/$. The annual interest rate is in Japan is 5% for lending and 6% for borrowing; and in the United States it is 7% for lending and 8% for borrowing. The WACC is 7%. PCC can also buy a one-year call option on yen at the strike price of...
Suppose Boeing Corporation exported a Boeing 787 to British Airway and billed £20 million payable in one year (i.e., Boeing has a £20 million receivable in one-year). The money market rates, foreign exchange rates, and option prices are given as follows: The U.S. one-year interest rate: 2% per annum The U.K. one-year interest rate: 3.5% per annum The spot exchange rate: $1.32/£ One-year forward rate: $1.2985/£ Call option: exercise rate: $1.31, premium: $0.015/£ Put option: exercise rate: $1.31, premium: $0.02/£...
QUESTION 1 A U.S. MNC will receive 1 million Indian rupees (INR) in one year. The current spot rate is INR75 /USD and the one year forward rate is INR320/USD. The annual interest rate is 5 percent in India and 0 percent in the United States. The dollar amount the firm will receive using the forward hedge is USD 75,000,000 USD 13,333 USD 3,125. None of the answers is correct. QUESTION 2 Suppose that Boeing Corporation exported a Boeing 747...