You have the quotations on the last page available for the purpose of evaluating
ID: 2720334 • Letter: Y
Question
You have the quotations on the last page available for the purpose of evaluating a set of possible currency transaction exposure hedges. For the purposes of lending or borrowing cash, use the appropriate Prime Rate as given if you are borrowing. If you are lending (investing) cash, use the appropriate Prime Rate minus ½% (Prime -.5%).
10. Assume there is an account receivable of ¥62,500,000 due to your company on January 25, 19XX (say “60 days”).
If you use a money market hedge:
How much do you receive today (in $) [6 points]?
Assume that you take the money you receive today (from question b) and invest it for the 60-day period (until January 25). What is your ending receipt from using the money market hedge on your account receivable [4 points]?
Consider the use of an option to hedge this AR. Assume that you borrow the money needed to pay the premium.
What is your ending “net” receipt if the ending spot rate is $.0080/¥ [7 points]?
What is your ending “net” receipt if the ending spot rate is $.0086/¥ [3 points]?
11. Assume that your company owes an account payable of 187,500 Swiss franc in 30 days (December 23, 19XX).
a) How much will you owe if you use a forward contract to hedge this payable (use the Thursday quotation) [4 points]?
b) How much will you owe in $ (on December 23) if you use a money market hedge [6 points]?
c) You want to use the (appropriate, available) European style option that has the lowest up-front cost to initiate. How much will you pay in premium for this option hedge [4 points]?
d) Assuming that you borrowed the money to pay for these options (from question c), what will your ending “net” cost be if the ending spot rate is $.76/SF [6 points]?
Explanation / Answer
10 Assume there is an account receivable of ¥62,500,000 due to your company on January 25, 19XX (say “60 days”). If you use a money market hedge: How much do you receive today (in $) [6 points]? Solution Account Receivable ¥625,00,000 Today amount $5,00,000 Assume that you take the money you receive today (from question b) and invest it for the 60-day period (until January 25). Solution Investment $5,00,000 Today amount ¥581,39,535 What is your ending receipt from using the money market hedge on your account receivable [4 points]? Solution Account Receivable ¥581,39,535 Consider the use of an option to hedge this AR. Assume that you borrow the money needed to pay the premium. Solution Account Receivable ¥581,39,535 What is your ending “net” receipt if the ending spot rate is $.0080/¥ [7 points]? Solution Account Receivable $5,00,000 What is your ending “net” receipt if the ending spot rate is $.0086/¥ [3 points]? Solution Account Receivable $5,37,500 Assume that your company owes an account payable of 187,500 Swiss franc in 30 days (December 23, 19XX). a) How much will you owe if you use a forward contract to hedge this payable (use the Thursday quotation) [4 points]? Solution Accounts payable 187500 Forward contract rate 0.7234 Accounts payable 135637.50 b) How much will you owe in $ (on December 23) if you use a money market hedge [6 points]? Solution Accounts payable 187500 Forward contract rate 0.724173 Accounts payable 135782.44 c) You want to use the (appropriate, available) European style option that has the lowest up-front cost to initiate. How much will you pay in premium for this option hedge [4 points]? Solution Premium 318.75 d) Assuming that you borrowed the money to pay for these options (from question c), what will your ending “net” cost be if the ending spot rate is $.76/SF [6 points]? Solution Accounts payable 140008.31
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.