Suppose that Mullen Co, a U.S.-based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a currency call option to hedge this payable. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.04. On the following graph, use the blue points (circle symbols) to plot the contingency graph for hedging this payable with a call option. Plot the points from left to right in the order you would like them to appear. Line segments will connect automatically. Plot the 3 blue points for the following pound spot rates: $1.16, $1.20, $1.26. Note: The vertical axis measures dollar cash outflows from the hedge, which includes the price paid for pounds and any option premium. Dollar Cash Outflows from Hedge (Dollars per Pound) 1.26 1.25 1.24 1.23 1.22 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 Pound Spot Rate in One Year (Dollars per Pound) Contingency Graph

Suppose that Mullen Co, a U.S.-based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a currency call option to hedge this payable. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.04. On the following graph, use the blue points (circle symbols) to plot the contingency graph for hedging this payable with a call option. Plot the points from left to right in the order you would like them to appear. Line segments will connect automatically. Plot the 3 blue points for the following pound spot rates: $1.16, $1.20, $1.26. Note: The vertical axis measures dollar cash outflows from the hedge, which includes the price paid for pounds and any option premium. Dollar Cash Outflows from Hedge (Dollars per Pound) 1.26 1.25 1.24 1.23 1.22 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 Pound Spot Rate in One Year (Dollars per Pound) Contingency Graph

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 7QA

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Suppose that Goodwin Co., a U.S. based MNC, knows that it will receive 200,000 pounds in one year. It is considering a currency put option to hedge this receivable. Currency put options on the pound with expiration dates in one year currently have an exercise price of $1.18 and a premium of $0.03. On the following graph, use the blue points (circle symbols) to plot the contingency graph for hedging this receivable with a put option. Plot the points from left to right in the order you would like them to appear. Line segments will connect automatically. Plot the 3 blue points for the following pound spot rates: $1.15, $1.18, $1.22. Note: The vertical axis measures dollar cash inflows from the hedge, which includes the price received for pounds and any option premium. Dollar Cash Received from Hedge (Dollars per Pound) 1.19 1.18 1.17 1.16 1.15 1.14 1.13 1.12 1.11 1.15 1.16 1.17 1.18 1.19 1.20 1.21 Pound Spot Rate in One Year (Dollars per Pound) Contingency Graph ?
Suppose that Mullen Co, a U.S.-based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a currency call option to hedge this payable. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.21 and a premium of $0.02. Mullen Co. wishes to use its own forecast of what the spot rate might be for the pound one year from now. • $1.18, with 30.00% probability • • $1.22, with 60.00% probability • $1.24, with 10.00% probability For each scenario in the following table, fill in the dollar amount paid per unit for the call options (5th column), the total dollar amount paid for 200,000 pounds when using the call options (6th column), and whether Mullen would exercise the options (7th column) Pound Spot Rate in 1 Scenario Year Option Premium Per Unit Cost of Owning Option Total Cost of Owning Options, With Premium Dollar Amount Paid for 200,000 Pounds when Owning Call Options Exercise Options?…
This question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90.a. Which asset has the higher expected rate of return at current prices? Given their rates of return, which asset should investors be buying and which asset should they be selling?b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ceases, will A and B have the same price?Next, consider another pair of assets, C and D. Asset C will make a single payment of $150 in one year while D will make a single payment of $200 in one year. Assume that the current price of C is $120 and that the current price of D is $180.c. Which asset has the higher expected rate of return at current…
Kansas Corp., an American company, has a payment of €5.3 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $5,888,889, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5.3 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $103,000 for a one-year call option on €5.3 million at an exchange rate of 0.88 €/$. a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas's net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.) Strategy 1 Strategy 2 Net Dollar Cost b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas's net dollar cost for the payable under each strategy? (Round your answer to the nearest whole…
Masons intends to purchase goods valued at £2.09 million, with payment due in one year. To mitigate the exchange rate risk associated with the £2.09 million payment, Masons is considering the forward market hedging strategy. Using the data provided in Table 1, determine the cost in Chinese yuan (CNY) when employing the forward market hedging strategy. (Please input the value as a whole number, excluding any signs or symbols). TABLE 1 For Chinese yuan (CNY) Spot rate £0.3755/CNY One-year forward rate £0.5381/CNY One-year CNY deposit and borrowing rate 8.48% One-year call options Exercise price = £0.52 Premium = £0.03 One-year put options Exercise price = £0.58 Premium = £0.06 For British Pound (£) Spot rate CNY3.5909/£ One-year forward rate CNY1.918/£ One-year £ deposit and borrowing rate 4.71% One-year call options Exercise price = CNY1.64 Premium = CNY0.17…
Kansas Corporation, an American company, has a payment of €5.9 million due to Tuscany Corporation one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $ 6,555,556, but Kansas faces the risk that the €/S rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5.9 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $109,000 for a one-year call option on €5.9 million at an exchange rate of 0.88 €/$. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount.
Your firm purchased an equipment from a British company. Total cost was £50,000 (in 30 days). The pound is expected to appreciate against $ substantially in 30 days. Let's suppose it would be $1.6/£ in 30 days. Questions: 1. You decide to use option to hedge against the exchange rate risk. What would be your maximum (or minimum) strike price if it is possible for you to find that strike price? 2. After you bought the option, the spot exchange rate in 30 days turns out to be lower than the strike price. What would you do and what do you need to do?
"A French company is considering a project in US. The project will cost $100M. The cash flows are expected to be $30M per year for 5 years. The current spot exchange rate is $1.20/. The risk - free rate in the US is 1%, and the risk - free rate in Europe is 2%. The dollar required return on the project is 12%. Find the NPV in foreign currency using foreign currency approach. The answers below are in millions." -37.281 161.634 8.143 1.631 82.136
You are analyzing a very low-risk project with an initial cost of €120000. The project is expected to return €40000 the first year, €50000 the second year and €60000 the third year. The current spot rate is €.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. using the home currency approach, what is the net present value of this project in U.S dollars?
Without Using Excel: ABC Company wants to possibly expand its plant in Europe. The current spot exchange rate is for Euro is €0.83. The initial investment is €2.1, with projected cash flows for three years at €950,000. The discount rate is 10%. The risk-free rate in the US is 5 percent and the risk-free rate in Europe is 7 percent. Calculate the NPV of the project into US Dollars, rounding to the nearest cent, format as "XXX,XXX.XX"
Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed to pay for the payables (including the option premium paid) for each option available under each possible scenario. Spot Rate of Pound Exercise Price Exercise Price Exercise Price 90 Days = $1.71; = $1.76; = $1.80; Scenario from Now Premium = $.04 Premium = $.06 Premium = $.03 1 $1.65 2 1.74 3…
The interest rate in Britain is 12% while it is 7% in the United States. The spot rate is 0.5714 pounds per USD and the 1-year forward rate is 0.5952 pounds per USD. If you can borrow $1 million or its equivalent, how can you use the information to earn an arbitrage profit? Compute the profit and provide all computational steps in support of your answer.