Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. Assuming that the forward exchange rate is the best predictor of the future spot rate, what is the expected future dollar revenue when the option hedge is used? $1,200,000. $1,150,000. $1,297,200. $1,180,000. $1,180,000. $1,082,800. $1,102,800.

Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. Assuming that the forward exchange rate is the best predictor of the future spot rate, what is the expected future dollar revenue when the option hedge is used? $1,200,000. $1,150,000. $1,297,200. $1,180,000. $1,180,000. $1,082,800. $1,102,800.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. What is the future dollar proceeds of this sale using the money market hedge? Question 1 options: $1,180,000. $1,102,800. $1,150,000. $1,118,056. $1,200,000. $1,182,857.
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. What is the future dollar proceeds of this sale using the money market hedge? $1,102,800. $1,180,000. $1,182,857. $1,200,000. $1,118,056. $1,150,000.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥788 million payable in one year to a bank in Tokyo. The current spot rate USDJPY = 105.50 and the one year forward rate is 104.50. The annual interest rate is 1.3 percent in Japan and 2.6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0094 per yen for a premium of 0.041 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current spot rate is ¥125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.0140 cents per yen. Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. Required: a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used. c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge? Answer is…
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current spot rate is ¥125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.0140 cents per yen. Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. Required: a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used. c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge? > Answer is…
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 540 million yen payable in one year. The current spot rate is ¥126/$ and the one-year forward rate is ¥112/$. The annual interest rate is 7 percent in Japan and 10 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $.0079 per yen for a premium of .014 cents per yen. a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 113.33 yen per dollar and the one-year forward rate is 111.5 yen per dollar. The annual interest rate is 0.9% in Japan and 2.4% in the U.S. PCC can also buy a one-year call option on yen at the strike price of $.008900 per yen for a premium of .017 cents per yen. Compute the future dollar costs of meeting this obligation using the money market hedge. (USD, no cents)
ECG has purchased an electric power generator from Mitsui Trading Company of Japan. ECG owes Mitsui ¥250 million in six months. The present spot rate is ¥250/$. The six-month forward rate is ¥248/$. ECG can borrow or invest yen at 8% and U.S. dollars at 10% (annual rates). ECG can also purchase a six-month call option on the Stock Exchange at a strike price of ¥250 for a premium of 0.004 cents per yen. Compare the alternative ways ECG can make its payment. Which way do you recommend?
The current spot rate for the $ (US Dollar) to ¥ (Yen) exchange rate is 120. General Electric plans to purchase manufacturing equipment from a Japanese supplier with payment due one year from today in Yen. GE is offered a one-year currency forward contract priced at 116 ¥ (Yen) per $ (US Dollar) to hedge a $ to Yen conversion at the end of one year. GE’ is able to borrow at 1.5% for one year in $’s and invest at 1.25% in $’s and is able to borrow at 0.5% in Yen for one year and invest for one year at 0.25% in Yen. What is the fair value of the forward contract for GE? Should the company buy the forward? Why?
ATZ (US Company) expects to receive a 19 million euros in 90 days from a Australia customer. The current spot rate is S$1.836 per AUD, and the 90 day forward rate is S$1.638 per AUD. In addition, the annualized three-month AUD and USD interest rate 2.81% and 4.03%, respectively. What is the hedged value of the AUD receivable using the forward contract? How does that compare to a situation when the exchange rate remains unchanged at the spot rate?
Construct-Tech Limited a Ghanaian supplier of industrial equipment just purchased equipments from a Korean heavy equipment manufacturer. The purchase price was KRW750 million. KRW100 million has already been paid, and the remaining KRW650 million is due in six months. The current spot rate is KRW170/GH¢, and the 6-month forward rate is KRW175/GH¢. The 6-month Korean won interest rate is 16% per annum, the 6-month Ghana cedi rate is 14% per annum. Construct-Tech can invest at these interest rates or borrow at 2% per annum above those rates. RequiredCompare alternate ways that Construct-Tech might deal with its foreign exchange exposure. What do you recommend and why?

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