Assume the following information:90-day U.S. interest rate90-day Malaysian interest rate3%5%90-day forward rate of Malaysian ringgitSpot rate of Malaysian ringgit$0.394$0.398Assume that the Santa Barbara Co. in the United States will need 250,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a moneymarket hedge? Substantiate your answer with estimated costs for each type of hedge. Do not round intermediate calculations. Round your answers to the nearest dollar.The firm will pay out $in 90 days if it uses the forward hedge and $if it uses the money market hedge. Thus, it should use the -Select-hedge.

Santa Barbara Co. should use a forward hedge to minimize their payables position in 90 days.Here's a…

Answered: Assume the following information:…

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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Hedging using Swap You want to borrow in U.S. dollars at a fixed rate of interest to match with your investment cash flows. Bank A offers you to borrow in US dollars at 7% or in Australian dollars at LIBOR + 0.5% per annum (adjusted for the differential impact of taxes). You found that Bank A also offer another customer who requires a floating-rate loan to borrow in US dollars at 7.5% or in Australian dollars at LIBOR + 2.0% per annum. Bank A can arrange a swap between you and the other customer with a net 20-basis-point spread. Design a swap that minimizes your borrowing costs and appears equally attractive to you and the other customer. What rates of interest will you and that customer end up paying? (Provide explanation, list your calculation process and use figure to illustrate the swap structure).
Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF 1.6 million, a one-year period, an initial spot rate of SF 1.4600/$, a 4.934% cost of debt, and a 38% tax rate, what is the effective after-tax cost of debt for one year for a U.S. dollar-based company if the exchange rate at the end of the period was: a. 1.4600SF/$ b. 1.4000SF/$ c. 1.3350SF/$ d. 1.5730SF/$
Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation ZAR spot rate under PPP 100 105 111 Expected U.S. one-year interest rate Expected South African one-year interest rate Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Expected ZAR spot rate $ 0.186 $ 0.169 7% 5% 10% 8% b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations. Round…
Tyson Inc. has an account payable in Swedish krona due in 60 days. Which would be an appropriate hedge? Question 9 options: Enter into a forward contract to sell Swedish krona in two months Borrow Swedish krona for 60 days for the purpose of a money market hedge Buy a put option on the Swedish krona, expiring in 60 days Buy a call option on the Swedish krona, expiring in 60 days
Assume the following information (rates are actual 90-day interest rates, not annualized): Spot rate of Canadian dollar S 0.900 90 day forward rate of Canadian dollar $0.890 90-day Canadian interest rate 3.50% 90-day U.S. interest rate 2.40% Given this information, the yield (percentage return) to a U. 5. investor who used covered interest arbitrage would be ( assume the investor invests $1 million). The yield (percentage return) to a Canadian investor who used covered interest arbitrage would be Group of answer choices
The next problem is about covered interest rate parity. Assume that the home country is the Philippines, and a Filipino investor is mulling whether or not to invest P1 million in the US or in the PH. Bonds in either country mature in just 1 year. The initial parameters are as follows: iPH ius = = 8% ● et+1 = 12% • et P50/USD = P55/USD Answer the following: • If the Filipino invests in a PH bond for 1 year, how much will she earn? • If the Filipino invests in a US bond for 1 year, how much will she earn in peso terms? • Is there a difference between the two values above? • How much did the peso depreciate/appreciate from time t to t + 1? • For the investor to be indifferent between investing here and abroad, she should engage in a forward exchange rate contract at what rate Fț?
Company A wants to borrow US Dollar (USD) at a floating rate of interest and Company B want to borrow Australian Dollar (AUD) at a fixed rate of interest. They have been quoted the following rates by Bank C. USD AUD Company A LIBOR +0.5% 5.0% Company B LIBOR+1.0% 6.5% Develop an interest rate swap that will net the bank 50 basis point spread and will appear equally attractive to Company A and Company B. Explain your answer.
Multinational Finance & Investment Question 2 f) If the spot exchange between Euro and pound is Euro 1.1/Pound, and the UK Guilt returns a 0.5% yield. It is also known that the Euro is expected to depreciate against the pound by 0.5%. What is the yield of a French government bond?
Assume the spot rate on the New Zealand dollar is NZ$1.0926, the risk-free nominal rate in the U.S. is 3.8 percent and 4.1 percent in New Zealand. What is the four-year forward rates best establishes the approximate interest rate parity condition?
Risk-free rate in your country (= interest you earn on government bond) = 7% Based on our analysis, we recommend an ERP of 7.0% for the UAE as of 30 September 2018. the risk-free rate. It represents the additional return investors require from equity investment to reflect the additional risk in the asset compared to a 'risk-free' asset. Interest you earn on a deposit in your country in your bank = 2.5% Emirates National Bank of Dubai Flexi Deposit has 2.5% of interest annually. Inflation rate in your country = 2.18% UAE’s inflation rate for 2022 is 2.18%. It was 2.02% back in 2021. Real risk-free rate The formula for real risk-free rate is (1 + Normal Risk Free Rate) / (1 + Inflation Rate)-1 (1+0.07) / (1+0.0218)- 1 = 0.047 This shows that in UAE there will be a return on an investment that is risk-free. Real interest rate on your bank deposit The formula for the real interest rate on your bank deposit is (1+Nominal Interest Rate)/ (1+…
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