At year 1, Daisy Ltd, American company expects CFs of 150000$ from operations in US and 470000 pounds from sales in UK. Daisy has debt of 540000$ due in one year. If the company bankrupts, the costs are 70000$. The exchange rates for one pound in one year is expected to be 0.75$ with probability 30%, 0.85$ with probability 40 %, 0.90$ with probability 30 %. If there are no other cash flows, risk- neutral investors and zero discount rate, find the following: 1) If Daisy can hedge its pound exposure with a put option with strike price of 0.85$ and a premium of 0.025$ per pound, what are the expected CFs to debt/eguityholders, and the total value of the firm?

MATLAB: An Introduction with Applications
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ISBN:9781119256830
Author:Amos Gilat
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At year 1, Daisy Ltd, American company expects CFs of 150000$ from operations in US and 470000
pounds from sales in UK. Daisy has debt of 540000$ due in one year. If the company bankrupts, the
costs are 70000$. The exchange rates for one pound in one year is expected to be 0.75$ with probability
30%, 0.85$ with probability 40 %, 0.90$ with probability 30 %. If there are no other cash flows, risk-
neutral investors and zero discount rate, find the following:
1) If Daisy can hedge its pound exposure with a put option with strike price of 0.85$ and a
premium of 0.025$ per pound, what are the expected CFs to debt/eguityholders, and the total
value of the firm?
Transcribed Image Text:At year 1, Daisy Ltd, American company expects CFs of 150000$ from operations in US and 470000 pounds from sales in UK. Daisy has debt of 540000$ due in one year. If the company bankrupts, the costs are 70000$. The exchange rates for one pound in one year is expected to be 0.75$ with probability 30%, 0.85$ with probability 40 %, 0.90$ with probability 30 %. If there are no other cash flows, risk- neutral investors and zero discount rate, find the following: 1) If Daisy can hedge its pound exposure with a put option with strike price of 0.85$ and a premium of 0.025$ per pound, what are the expected CFs to debt/eguityholders, and the total value of the firm?
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