San Antonio Aviation\'s Order with the Airbus Consortium UK The San Antonio Avia
ID: 2412489 • Letter: S
Question
San Antonio Aviation's Order with the Airbus Consortium UK The San Antonio Aviation Company of San Antonio, Texas, has received an order for 195,000 seats for the Airbus A-380 from the Airbus Consortium in Great Britain. Payment to be in British pounds sterling The seats will be shipped to Airbus under the terms of a letter of credit issued by the Royal Bank of Scotland on behalf of Airbus for the benefit of SA Aviation. This Letter of Credit specifies that the face value of the shipment, £20,500,000, will be paid 180 days after the Royal Bank of Scotland accepts a draft drawn in accordance with the terms of the Letter of Credit. No exchange rate is quoted in the Letter of Credit. The current discount rate in London on 180-day banker's acceptances is 8% per annum, and SA Aviation estimates its weighted average cost of capital to be 9% per annum. The commission for selling a banker's acceptance in the discount market is 1.25% of the face amount. (a) Would the San Antonio Aviation Company gain by holding the banker's acceptance to maturity or discounting the banker's acceptance at once? (b) Does San Antonio Aviation Company incur any risks in this transaction? How might they manage these risks given the information below? (c) Assume that the UK charges a hefty 12% Value Added Tax for imports. SA Aviation is considering fabricating these seats off on the Guernsey Islands. This would allow them to import these seats free of VAT! The following are the projected cash flows in sterling: Year: 0 1 2 3 4 5 E Cash Flows: 9.6 1.7 3.4 2.4 1.8 4.3 The nominal interest rate in the US is 3% while the rate in the UK is 5%. The current Spot Rate is: 0.6410E/s. The 180-day Forward Rate is £0.6415/s. UK lending rates are 8%. The 180 day strike price for the American Put Option to sell Sterling is: $1.5574/E with a 0.2 cent premium per E. (d) List the correct sequence involved and all required documents in the export of seats from the SA Aviation Company to the Airbus Consortium in the UK.Explanation / Answer
receivable in GBP
we require $.
action will be sell GBP for $.
total value will be
£2,05,00,000
a. forward rate. £0.6415 / $
amount of $ receivable = 20500000 £ / 0.6415 = $31.95million
b.
money market hedge.
UK lending rate = 8%
US rate = 3%
borrow in UK of £20.5m / (1 + 4%) = £19.71million
convert £19.71million @ spot rate which fetch £19.71 /0.641 = $30.75million
deposit for 6months in US which gets $30.75million (1.015) = $31.21million
C.
put option
premium payable in $
£20.5million * 0.2% / 0.641 * 1.015 = $0.065mn (premium paid now but interest for the premium for 3months also considered)
amount receivable by selling sterling = 1.5574 * 20.5 = $31.92 million
less:- premium paid ($0.065mn)
total = $31.855mn
among all the options forward cover is the best option which give higher $ inflow than others
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