A U.K importer has future payables of DM 20,000,000 in one year. The importer must decide whether to use option or a money market to hedge this position. The following information is available Spot rate £ 0.74 =DM1 One year call option Exercise Price £ 0.76= DM1 Premium £ 0.04 per DM One year Put Option Exercise Price £ 0.77 =DM Premium £ 0.02 per DM Sterling Deposit Rate 8% Per Annum Sterling Borrowing Rate 9% Per Annum DM Deposit Rate 6% Per Annum DM Borrowing Rate 7% Per Annum Forecast one-spot Rate £ 0.70 £0.77 £0.70 Probability 25% 55% 20% Required: Assume that the importer’s objective is to minimize the sterling value of DM payables. Which of the hedging instruments would you recommend? Verify your answer by estimating the sterling cost for each type of hedge. Compare cost of hedging and non-hedging

A U.K importer has future payables of DM 20,000,000 in one year. The importer must decide whether to use option or a money market to hedge this position. The following information is available Spot rate £ 0.74 =DM1 One year call option Exercise Price £ 0.76= DM1 Premium £ 0.04 per DM One year Put Option Exercise Price £ 0.77 =DM Premium £ 0.02 per DM Sterling Deposit Rate 8% Per Annum Sterling Borrowing Rate 9% Per Annum DM Deposit Rate 6% Per Annum DM Borrowing Rate 7% Per Annum Forecast one-spot Rate £ 0.70 £0.77 £0.70 Probability 25% 55% 20% Required: Assume that the importer’s objective is to minimize the sterling value of DM payables. Which of the hedging instruments would you recommend? Verify your answer by estimating the sterling cost for each type of hedge. Compare cost of hedging and non-hedging

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 56QA

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