Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The currentspot rate is ¥125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of0.0140 cents per yen.Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer inwhole dollars not in millions.Required:a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges.b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost ofmeeting this obligation when the option hedge is used.c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge?Answer is complete but not entirely correct.Complete this question by entering your answers in the tabs below.Required ARequired BRequired CAssuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar costof meeting this obligation when the option hedge is used.Expected future dollar cost4,167,932

Hedging - Hedging can also be used to protect a corporation's balance sheet when it has invested in…

Answered: Princess Cruise Company (PCC) purchased…

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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On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange rates for the ruble follow:Sharp’s incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 31.a. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 100,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract.b. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 100,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm…
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. What is the future dollar proceeds of this sale using the money market hedge? Question 1 options: $1,180,000. $1,102,800. $1,150,000. $1,118,056. $1,200,000. $1,182,857.
Assume that Stevens Point Co. has net payables of 200,000 Singapore dollars in 90 days. The spot rate of the S$ is US$0.71/1S$, and the Singapore periodic interest rate is 1.5% over 90 days (annual rate is 6% per year, so periodic rate is 1.5% per 90 days). Assume US periodic interest rates of 1% over 90 days or (annual rate is 4%, so periodic rate is 1% per 90 days). If the U.S. firm could implement a money market hedge, what is the cost of the payables in US dollars in 90 days using a money market hedge? Assume borrowing and lending rates are the same for simplicity. Be precise.
Manshukh
Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 106,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchased a two-month call option on 106,000 pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The option has a strike price of $1.35 per pound and costs $1,060. The spot rate for pounds is $1.35 on June 20 and $1.40 on September 20. What amount will Torres Corporation report as an option expense in net income for the quarter ended September 30? Multiple Choice $530. $5,300. $2,300. $1,060.
ABC is asked to quote a price in Jamaican dollars for computer sales to a Jamaican company. The computers will be paid for in four equal, quarterly installments, beginning 90 days from now. ABC requires a minimum price of $2.5 million to accept this contract. Suppose the spot and forward rates for the J$ are as follows: Spot 90-Day 180-Day 270-Day 360-Day $0.0307 $0.0302 $0.0298 $0.0293 $0.0287 What is the minimum J$ price that ABC should quote for this order? a. J$ 87,108,014 b. J$ 82,781,457 c. J$ 84,745,763 d. J$ 81,433,225
Y2
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. Assuming that the forward exchange rate is the best predictor of the future spot rate, what is the expected future dollar revenue when the option hedge is used? $1,200,000. $1,150,000. $1,297,200. $1,180,000. $1,180,000. $1,082,800. $1,102,800.
Sysco corporation has purchased currency call options to hedge a 4,320,000 Swedish krona payable. The premium is $0.015 (per unit of Swedish krona) and the exercise price of the option is $0.097 per Swedish krona. If the spot rate at the time of maturity is S0.105 per Swedish krona, what is the total amount paid by the corporation if it acts rationally (after accounting for the premium paid)? Question 27 options: S 419,040. $354,240. $518,400. S453,600. $483,840.
You have just purchased a six-month, $550,000 negotiable CD, which will pay a 8.5 percent annual interest rate. a. If the market rate on the CD rises to 9 percent, what is its current market value?b. If the market rate on the CD falls to 8.25 percent, what is its current market value?

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