A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?
A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?
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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A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the
a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor.
b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?
Transcribed Image Text:Dividend Declared due in Six Months in Sri Lanka Rupee (LKR)
Spot Rate (LKR/US$)
Six Forward Rate (LKR/US$)
LKR 4,350,000
196
198
Six Month Option on :
Call Option
Put Option
Strike Rate (LKR/S)
204
204
Premium, Percent Per Year
3.5 %
5.5 %
U.S. Exporter's Weighted Average Cost of Capital (WACC)
9%
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