Problem 4 A Saudi company has bid for an export order to a customer in the U.K. That order would generate a cash flow of £5 million in three months. Currently, the spot rate is SAR4.70/£ and the three-month forward rate is SAR4.68/£. The company's CFO wants to hedge this FX exposure, and he has asked you to help him determine whether it should be with a forward or with an option, considering that the company faces two sources of uncertainty: The uncertainty related to the export order, which it may or may not receive . The uncertainty related to the exchange rate between the SAR and the £ in three months Forward 4. If the company hedges with a forward, what would happen now? Specifically: . What would the position be? . What would the exchange rate on the forward be? . Would there be a cash flow? Buy £ forward or Sell £ forward Position Exchange rate Cash Flow Yes or No

Problem 4 A Saudi company has bid for an export order to a customer in the U.K. That order would generate a cash flow of £5 million in three months. Currently, the spot rate is SAR4.70/£ and the three-month forward rate is SAR4.68/£. The company's CFO wants to hedge this FX exposure, and he has asked you to help him determine whether it should be with a forward or with an option, considering that the company faces two sources of uncertainty: The uncertainty related to the export order, which it may or may not receive . The uncertainty related to the exchange rate between the SAR and the £ in three months Forward 4. If the company hedges with a forward, what would happen now? Specifically: . What would the position be? . What would the exchange rate on the forward be? . Would there be a cash flow? Buy £ forward or Sell £ forward Position Exchange rate Cash Flow Yes or No

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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Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm. The finance manager expects the spot price of the € to remain stable at the current rate of $1.60/€. But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low as $1.50/€. Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures. Six months Call and Put options with an exercise price of $1.60/€ are available. The Call sells for $.08/€ and the Put sells for $.04/€. A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used? assume…
Q1. Suppose a Bangladeshi exporter is expecting to receive $15 million sometime in the next three months from an American importer. To hedge this, the Bangladeshi exporter buys an option on the USS. The premium is 0.55 BDT/USS, for options with Exercise price = 0.551 a) What option should he buy? b) What is the cost incurred today by the Bangladeshi exporter? c) ) What is the price floor that the exporter has set on the price of US$ 84.5 BDT/USS.? d) What is the actual amount that the exporter will receive if the spot rate at the end of three months is 85.5 BDT/USS? e) What is the actual amount that the BD exporter will receive if the spot rate at the end of three months is 84.5 BDT/USS? Q2. Suppose a Bangladeshi importer is expecting to pay $15 million sometime in the next three months to an American exporter. To hedge this, the Bangladeshi importer buys an option on the US$. The premium is 0.75 BDT/US$, for options with Exercise price = 86.5 BDT/US$. a) What option should he buy? b)…
As the chief financial officer of a U.S. firm, you expect to receive payment of €1 million in 90 davs. The current spot rate is $1.40 per euro. Your firm will incur losses on the deal if the dollar weakens to less than $1.10 per euro. Please list at least two derivatives and discuss your detailed strategy to hedge against this foreign exchange risk.
Assume the following information: 90-day U.S. interest rate 90-day Malaysian interest rate 3% 5% 90-day forward rate of Malaysian ringgit Spot rate of Malaysian ringgit $0.394 $0.398 Assume that the Santa Barbara Co. in the United States will need 250,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. Do not round intermediate calculations. Round your answers to the nearest dollar. The firm will pay out $ in 90 days if it uses the forward hedge and $ if it uses the money market hedge. Thus, it should use the -Select- hedge.
Problem 19-4 (Algo) Required: Suppose a U.S. investor wishes to invest in a British firm currently selling for £33 per share. The investor has $66,000 to invest, and the current exchange rate is $2/£. Consider three possible prices per share at £31, £36, and £41 after 1 year. Also, consider three possible exchange rates at $1.60/£, $2/£, and $2.40/£ after 1 year. Calculate the standard deviation of both the pound- and dollar- denominated rates of return if each of the nine outcomes (three possible prices per share in pounds times three possible exchange rates) is equally likely. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places.) X Answer is complete but not entirely correct. Standard deviation of pound-denominated return Standard deviation of dollar-denominated return 12.37 19.68 %
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.
i need the answer quickly
(d) Your firm, a Singapore company, imports electronic products from America. Your firm has purchased USD 1 million worth of products and is to pay in one month's time. The current spot rate is SGD1.40/USD. (i) (ii) (iii) Will your company be concerned about an appreciation or depreciation in the USD? Explain your answer. Your firm is considering purchasing an option to hedge the risk of the USD movements against the SGD. Should your firm purchase a USD call or put option? Justify your answer. The option your firm purchased has a strike price of SGD1.41/USD. Given that the spot rate in one month's time is SGD1.42/USD, should your firm exercise the option? Explain your reason(s).
None
please answer fast i give upvote
4. Suppose, the INR65.4015/USD in the FX Market. The selling price of the basic SONY LED TV is USD 75 in US, while in India the same TV is sold for 5,300 INR. What should be the forward rate USD/INR to valid the PPP? If the PPP is not valid what are the necessary steps to get the equilibrium in US and Indian markets?

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