Question 2In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and thecompany wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will eitherappreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All ratesare continuous compounding (please round your answers to 4 decimals in the exchange rate calculations).As the financial manager of the company, you look at Bloomberg and collect the following information:• U.S. interest rate:..4% p.a.5% p.a.1 AUD=0.63 USDSpot rate:Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-monthmaturityPut option premium 0.02 USD, with exercise exchange rate 1 AUD-0.64 USD and 6-monthmaturityAustralian interest rate:1) Calculate the 6-month forward exchange rate, describe how a forward agreement can be used tohedge the receivable money, and calculate the resulting amount of USD in 6 months. 2) If the 6-month forward exchange rate is 1 AUD-0.65 USD, is there any arbitrage opportunity? Ifso, construct an arbitrage strategy based on 2,000,000 AUD in 6-month time and identify thearbitrage profit.3) Describe how an option can be used to hedge the receivable and calculate the expected amount ofUSD received in 6 months.4) Calculated the expected exchange rate and the expected amount of USD received without hedging.Based on the above analysis, compare the effectiveness of no-hedging, forward, and optionhedging strategies and outline their differences, advantages, and disadvantages.

Interest rate parity relationship Interest rate parity relationship dictates the forward exchange…

In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and the company wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will either appreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All rates are continuous compounding (please round your answers to 4 decimals in the exchange rate calculations) As the financial manager of the company, you look at Bloomberg and collect the following information: • U.S. interest rate: . 4% p.a. 5% p.a. 1 AUD=0.63 USD Spot rate: Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-month maturity Australian interest rate: ISD

In 6-month from today, a U.S. based company will receive 2,000,000 Australian dollars (AUD) and the company wants to hedge the exchange rate risk. The expected AUD spot rate in 6-month will either appreciate by 5% (p.a) with 40% probability or depreciate by 10% (p.a.) with 60% probability. All rates are continuous compounding (please round your answers to 4 decimals in the exchange rate calculations) As the financial manager of the company, you look at Bloomberg and collect the following information: • U.S. interest rate: . 4% p.a. 5% p.a. 1 AUD=0.63 USD Spot rate: Call option premium 0.03 USD, with exercise exchange rate 1 AUD-0.65 USD and 6-month maturity Australian interest rate: ISD

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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5. A U.S. firm expects a receivable (cash inflow) of €1,000,000 in six months. The current exchange rate is $1.125/€. Firm wants to sell euros in six months (to convert the inflow into dollars). Consider 3 possible spot prices in six months. 1. $1.195/€ 2. $1.100/€ 3. $1.025/€ What kind of option, put or call, is appropriate to hedge with? In each scenario, what is the total amount of the firm's NET receivable? NET receivable implies you should consider the receivable as well as the hedging costs of buying the option. (Assume an option exercise price of $1.130/€ and option premium of $.016/€) | 1. 2. 3.
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