QUESTION 3 Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge an 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Assumptions Spot rate Spot rate, rupees/dollar Implied (calculated) spot rate 180-day forward rate Values 120.60($) 47.75(Rs/$) 2.5257/Rs) 2.4000/Rs) Expected spot rate in 180 days 2.6000 Rs) 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agent's exchange rate fee P&G India's cost of capital 4.850% 12.00% a. Required: Using the above exchange rate and interest rate data, make a comparison on THREE (3) hedging alternatives for payables. b. Determine the expected value of dollar cash outflows for optimal techniques between hedge and without hedge. Evaluate both. [Hint: Support with any recommendation of figures] C. Recommend a hedging strategy suitable for the company to hedge against the currency exchange risk from (a).
QUESTION 3 Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge an 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Assumptions Spot rate Spot rate, rupees/dollar Implied (calculated) spot rate 180-day forward rate Values 120.60($) 47.75(Rs/$) 2.5257/Rs) 2.4000/Rs) Expected spot rate in 180 days 2.6000 Rs) 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agent's exchange rate fee P&G India's cost of capital 4.850% 12.00% a. Required: Using the above exchange rate and interest rate data, make a comparison on THREE (3) hedging alternatives for payables. b. Determine the expected value of dollar cash outflows for optimal techniques between hedge and without hedge. Evaluate both. [Hint: Support with any recommendation of figures] C. Recommend a hedging strategy suitable for the company to hedge against the currency exchange risk from (a).
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 43QA
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![QUESTION 3
Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product
line from a Japanese company. Because of the shortage of working capital in India, payment
terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge an
8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs),
forward rates are available against the yen.
Assumptions
Spot rate
Spot rate, rupees/dollar
Implied (calculated) spot rate
180-day forward rate
Values
120.60($)
47.75(Rs/$)
2.5257/Rs)
2.4000/Rs)
Expected spot rate in 180 days
2.6000 Rs)
180-day Indian rupee investing rate
8.000%
180-day Japanese yen investing rate
1.500%
Currency agent's exchange rate fee
P&G India's cost of capital
4.850%
12.00%
a.
Required:
Using the above exchange rate and interest rate data, make a comparison on THREE
(3) hedging alternatives for payables.
b.
Determine the expected value of dollar cash outflows for optimal techniques between
hedge and without hedge. Evaluate both. [Hint: Support with any recommendation of
figures]
C.
Recommend a hedging strategy suitable for the company to hedge against the currency
exchange risk from (a).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F322742eb-4a31-4e3c-832a-7268262542b0%2Feb952500-929a-45ca-95bc-b91073796c76%2Fnaua2h_processed.png&w=3840&q=75)
Transcribed Image Text:QUESTION 3
Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product
line from a Japanese company. Because of the shortage of working capital in India, payment
terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge an
8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs),
forward rates are available against the yen.
Assumptions
Spot rate
Spot rate, rupees/dollar
Implied (calculated) spot rate
180-day forward rate
Values
120.60($)
47.75(Rs/$)
2.5257/Rs)
2.4000/Rs)
Expected spot rate in 180 days
2.6000 Rs)
180-day Indian rupee investing rate
8.000%
180-day Japanese yen investing rate
1.500%
Currency agent's exchange rate fee
P&G India's cost of capital
4.850%
12.00%
a.
Required:
Using the above exchange rate and interest rate data, make a comparison on THREE
(3) hedging alternatives for payables.
b.
Determine the expected value of dollar cash outflows for optimal techniques between
hedge and without hedge. Evaluate both. [Hint: Support with any recommendation of
figures]
C.
Recommend a hedging strategy suitable for the company to hedge against the currency
exchange risk from (a).
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