Question

In: Finance

Assume that a U.S. firm expects to make a payment of SF3,500,000 in 6 months and...

Assume that a U.S. firm expects to make a payment of SF3,500,000 in 6 months and wants to execute a money market hedge. The following information is available: U.S. borrowing interest rate = 5%; U.S. lending interest rate = 4%; Swiss borrowing interest rate = 8%;Swiss lending interest rate = 6%; Spot rate is $0.95/SF; The U.S. firm's weighted average cost of capital (WACC) is 10%. Explain very well if the U.S. firm intends to use the money market hedge to cover the payment of SF2,500,000, what shall it do, and what will be the total cost in USD in 6 months?

Solutions

Expert Solution

1] The strategy is to create an SF asset that
will have a maturity value of SF3500000 in
6 months time. For that, an SF deposit should
be made by borrowing in $. The steps involved
are:
Amount of deposit to be made in SF = 3500000/1.03 = SF 3,398,058
Amount to be borrowed in $ to enable the
deposit in SF = 3398058*0.95 = $      3,228,155
2] Actions to be taken today:
Borrow $3,228,155 at 2.5% [6 months rate]. The
total amount to be repaid = 3228155*1.025 = $      3,308,859
Convert the above $ into SF3,398,058 and
invest it at 3% [half year rate] to get after 6
months SF3,500,000.
3] Actions to be taken after 6 months:
Realize the SF deposit having a value of
SF3,500,000 and pay the amount due of
SF3,500,000.
Settle the borrowing in $ by paying, along with
interest the amount of $3,308,859.
4] The total cost in USD = $3,308,859 [the total
cost of borrowing in USD]

Related Solutions

Assume that a U.S. firm expects to make a payment of SF3,500,000 in 6 months and...
Assume that a U.S. firm expects to make a payment of SF3,500,000 in 6 months and wants to execute a money market hedge. The following information is available: U.S. borrowing interest rate = 5%; U.S. lending interest rate = 4%; Swiss borrowing interest rate = 8%;Swiss lending interest rate = 6%; Spot rate is $0.95/SF; The U.S. firm's weighted average cost of capital (WACC) is 10%. Explain very well if the U.S. firm intends to use the money market hedge...
A U.S. firm expects receivables of €300,000 in three months. The U.S. firm purchases a put option on the euros.
A U.S. firm expects receivables of €300,000 in three months. The U.S. firm purchases a put option on the euros. The strike price is $1.20/€ and the premium is $.021/€. What is the total dollar amount received from the euro receivable if the spot rate in three months is (Multiply any $/€ amount by €300,000)$1.13/€$1.18/€$1.23/€$1.28/€
A company expects to make a payment of €1,000,000 to their vendor in Germany in six...
A company expects to make a payment of €1,000,000 to their vendor in Germany in six months. The following information is available: Spot rate today = $1.1800 $/€ Six-month Forward Rate = $1.22 $/€ Six-month Call Option premium, E=$1.18 $0.04 Six month Put option premium, E=$1.18 $0.03 Six-month Interest rate in U.S. 4% per annum Amount € 1,000,000.00 a) Should the company be worried about the dollar depreciation or appreciating? b) How should the company hedge the payment using options?...
Assume that yields on U.S. Treasury securities were as follows: TERM RATE 6 months 4.15% 1...
Assume that yields on U.S. Treasury securities were as follows: TERM RATE 6 months 4.15% 1 year 5.36 2 years 5.54 3 years 5.76 4 years 5.90 5 years 6.10 10 years 6.35 20 years 6.67 30 years 6.72 a. Select a correct yield curve based on these data. b. What type of yield curve is shown? c. What information does this graph tell you? d. Based on this yield curve, if you needed to borrow money for longer than...
Leopold owes $600 due in four months and $700 due in 6 months. What cash payment...
Leopold owes $600 due in four months and $700 due in 6 months. What cash payment would pay off both debt if the interest rate is 13.5% (Use six months as the focal point).
A U.S. firm has payables of £250,000 in nine months. The U.S. purchases a call option...
A U.S. firm has payables of £250,000 in nine months. The U.S. purchases a call option on the pound. The strike price is $62/£ and the premium is $.06/£. What is the total dollar amount paid for the pound payable if the spot rate in nine months is (Multiply any $/£ amount by £250,000) $1.51/£        $1.61/£        $1.70/£ $1.78/£       
1. A U.S. company expects to pay 1 million Euros in six months. How can they...
1. A U.S. company expects to pay 1 million Euros in six months. How can they use forward contracts to hedge against the exchange rate risk? 2. The price of gold is currently $660 per ounce. The forward price for delivery in one year is $700. An arbitrage trader can borrow or lend money at 10% per annum. Identify an arbitrage strategy. 3. A trader owns one unit of gold. The trader can buy gold at $50 per ounce and...
A U.S. company expects to have to pay 10 million Mexican pesos in six months. Explain...
A U.S. company expects to have to pay 10 million Mexican pesos in six months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.
3. A U.S. importer has to make a euro500,000 payment to an Italian exporter in 60...
3. A U.S. importer has to make a euro500,000 payment to an Italian exporter in 60 days. They decide to purchase a European call option on euros with the following details: • Contract size: euro250,000 • Exercise price: $1.45/euro • Call option premium: $0.04 per euro What is the overall profit/loss given the following future spot rates? Should the importer exercise the option in each scenario? A) $1.40/euro B) $1.45/euro C) $1.49/euro D) $1.52/euro
Consider a 6%, 30 year, $200,000 level payment mortgage with a monthly payment of $1,199.10. Assume...
Consider a 6%, 30 year, $200,000 level payment mortgage with a monthly payment of $1,199.10. Assume up front financing cost (includes all costs paid to the lender and third parties except discount points) equal $3,000. Find the EBC if the borrower repays the loan after two years (assuming no direct points). What is the EBC if the lender charges one discount point? What is the EBC if the lender charges 2.5 discount point?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT