Alpha Company, U.S.-based manufacturer of industrial equipment, just purchased a Koreancompany that produces plastic nuts and bolts for heavy equipment. The purchase price wasWon7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 millionis due in six months. The current spot rate is Won1,110/S, and the 6-month forward rate isWonl,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollarrate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum abovethose rates. Alpha's weighted average cost of capital is 10%. Given this information, determinewhether a forward hedge or a money market hedge would be most appropriate. Please show yourwork!

i) Amount of dollars to be paid if covered under Forward Hedge: = Amount payable * Forward rate = won6,500,000,000 ÷ 1175 = $5,531,914.8936 ii) Amount of dollars to be paid if covered under money market hedge: Present value of won to be payable in 6 months = Amount payable in won * Discount rate = won 6,500,000,000 ÷ (1+ (16/2)) =won 6,500,00,0,000÷ 1.080 = won 6,018,518,518.52 US dollars need now = won 6,018,518,518.52÷current spot rate =won 6,018,518,518.52 ÷ 1,100 =$ 5,422,088.75 Forward Amount of $ after 6 months =$ 5,422,088.75 * 1.050 =$ 5,693,193.19 Amount to be paid in forward hedge cover is less than money market hedge. So Forward Hedge should be taken

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Finance

Alpha Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum above those rates. Alpha's weighted average cost of capital is 10%. Given this information, determine whether a forward hedge or a money market hedge would be most appropriate. Please show your work!

Alpha Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum above those rates. Alpha's weighted average cost of capital is 10%. Given this information, determine whether a forward hedge or a money market hedge would be most appropriate. Please show your work!

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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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Alpha Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean
company that produces plastic nuts and bolts for heavy equipment. The purchase price was
Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million
is due in six months. The current spot rate is Won1,110/S, and the 6-month forward rate is
Wonl,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollar
rate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum above
those rates. Alpha's weighted average cost of capital is 10%. Given this information, determine
whether a forward hedge or a money market hedge would be most appropriate. Please show your
work!

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