Metals Inc. (a U.S.-based firm) just purchased a shipment of phosphates from Morocco for 6 million dirhams, payable in 6 months. Metals’ cost of capital is 8.6 percent per annum. The following information is available to the firm: 6-month interest rate for borrowing in the USA: 6.0% p.a. 6-month interest rate for borrowing in Morocco: 8.0% p.a. 6-month interest rate for investing in the USA: 5.0% p.a. 6-month interest rate for investing in Morocco: 7.0% p.a. Spot exchange rate: $1.00 = 10.00 dirhams 6-month call and put options on dirhams, both at an exercise price of 10.00 dirhams per dollar, are available at a premium of 2 percent (for both call and put options). Based on the available information, compare, contrast and graphically present alternative ways that Metal Inc might hedge its foreign exchange exposure. What is your recommendation?
Metals Inc. (a U.S.-based firm) just purchased a shipment of phosphates from Morocco for 6 million dirhams, payable in 6 months. Metals’ cost of capital is 8.6 percent per annum. The following information is available to the firm:
6-month interest rate for borrowing in the USA: 6.0% p.a.
6-month interest rate for borrowing in Morocco: 8.0% p.a.
6-month interest rate for investing in the USA: 5.0% p.a.
6-month interest rate for investing in Morocco: 7.0% p.a.
Spot exchange rate: $1.00 = 10.00 dirhams
6-month call and put options on dirhams, both at an exercise price of 10.00 dirhams per dollar, are available at a premium of 2 percent (for both call and put options). Based on the available information, compare, contrast and graphically present alternative ways that Metal Inc might hedge its foreign exchange exposure. What is your recommendation?
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