Nicantieri sold a cruise ship to MCC Cruise Line, a U.S. company, and billed $1 billion payable in six months. It is concerned with the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.15/€ and six-month forward exchange rate is $1.21/€ at the moment. Nicantieri can buy a six-month put option on U.S. dollars with a strike price of €0.85/$ for a premium of €0.02 per U.S. dollar. Currently, the six-month interest rate is 2% in the euro zone and 2.5% in the U.S. Compute the guaranteed euro proceeds from the American sale if Nicantieri decides to hedge using a forward contract.If Nicantieri decides to hedge using money market instruments, what action does Incantieri need to take? What would be the guaranteed euro proceeds from the American sale in this case?If Nicantieri decides to hedge using put options on U.S. dollars, what would be the ‘expected’ euro proceeds from the American sale? Assume that Nicantieri regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

One currency can be exchanged for another currency using the currency exchange rates. To hedge the…

Answered: Nicantieri sold a cruise ship to MCC…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Nicantieri sold a cruise ship to MCC Cruise Line, a U.S. company, and billed $1 billion payable in six months. It is concerned with the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.15/€ and six-month forward exchange rate is $1.21/€ at the moment. Nicantieri can buy a six-month put option on U.S. dollars with a strike price of €0.85/$ for a premium of €0.02 per U.S. dollar. Currently, the six-month interest rate is 2% in the euro zone and 2.5% in the U.S.

Compute the guaranteed euro proceeds from the American sale if Nicantieri decides to hedge using a forward contract.
If Nicantieri decides to hedge using money market instruments, what action does Incantieri need to take? What would be the guaranteed euro proceeds from the American sale in this case?
If Nicantieri decides to hedge using put options on U.S. dollars, what would be the ‘expected’ euro proceeds from the American sale? Assume that Nicantieri regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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