Question
In: Finance
Kansas Corp, an American company, has a payment of 5 million euros due to Tuscany Corp....
Kansas Corp, an American company, has a payment of 5 million euros due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 euro/dollar, this would cost Kansas $5,555,556, but Kansas faces the risk that the euro/dollar rate will fall in the coming year, so that it 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 million euros forward today at a one-year forward rate of 0.80 euro/dollar. Strategy 2 is to pay a premium of $100,000 for a one-year call option on 5 million euros at an exchange rate of 0.88 euro/dollar. a. Suppose that in one year the spot exchange rate is 0.85 euro/dollar. What would be Kansas' net dollar cost for the payable under each strategy? b. Suppose that in one year the spot exchange rate is 0.95 euro/dollar. What would be Kansas' net dollar cost for the payable under each strategy? c. Which hedging strategy would you recommend to Kansas Corp? Why?
Solutions
jeff jeffy answered 2 weeks agoRelated Solutions
Kansas Corp., an American company, has a payment of €6.1 million due to Tuscany Corp. one...
Kansas Corp., an American company, has a payment of €6.1 million
due to Tuscany Corp. one year from today. At the prevailing spot
rate of 0.90 €/$, this would cost Kansas $6,777,778, but Kansas
faces the risk that the €/$ 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 €6.1 million forward today at a...
Kansas Corp., an American company, has a payment of €6.2 million due to Tuscany Corp. one...
Kansas Corp., an American company, has a payment of €6.2 million
due to Tuscany Corp. one year from today. At the prevailing spot
rate of 0.90 €/$, this would cost Kansas $6,888,889, but Kansas
faces the risk that the €/$ 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 €6.2 million forward today at a...
On 11/1/14, Big Company purchased inventory from a French company. Payment of 200,000 euros is due...
On 11/1/14, Big Company purchased inventory from a French
company. Payment of 200,000 euros is due on 1/30/15. On 11/1/14,
Big also paid $1,800 cash to acquire a 90-day call option (to
purchase) for 200,000 euros. 11/1/14 12/31/14 1/30/15 Spot rate
$1.20 $1.22 $1.23 Fair value of call option $ 1,800 $4,400 $6,000
Prepare all journal entries for each of the above dates:
Manufacturing company borrows 5 million euros from the bank to fight the consequences of the corona...
Manufacturing company borrows 5 million euros from the bank to
fight the consequences of the corona virus. The repayment schedule
is based on an annuity. The interest rate is 10% and the loan is
paid back with 6 annual payments.
Question:
* What is the loan balance immediately the first loan payment is
made?
Hedging Decision. Indiana Company expects to receive 5 million euros in one year from exports. It...
Hedging Decision. Indiana Company expects to receive 5 million
euros in one year from exports. It can use any one of the following
strategies to deal with the exchange rate risk. Estimate the dollar
cash flows received as a result of using the following strategies:
unhedged strategy money market hedge option hedge The spot rate of
the euro as of today is $1.10. Interest rate parity exists. Indiana
Company uses the forward rate as a predictor of the future spot...
Indiana Company expects to receive 5 million euros in one year from exports. It can use...
Indiana Company expects to receive 5 million euros in one year
from exports. It can use any one of the following strategies to
deal with the exchange rate risk. Estimate the dollar cash flows
received as a result of using the following strategies:
a) unhedged strategy
b)money market hedge
c)option hedge
The spot rate of the euro as of today is $1.10. Interest rate
parity exists. Indiana Company uses the forward rate as a predictor
of the future spot rate....
Indiana Company expects to receive 5 million euros in one year from exports. It can use...
Indiana Company expects to receive 5 million euros in one year
from exports.
It can use any one of the following strategies to deal with the
exchange rate risk. Estimate the dollar cash flows received as a
result of using the following strategies:
unhedged strategy
money market hedge
option hedge
The spot rate of the euro as of today is $1.30. Interest rate
parity exists. Indiana Company uses the forward rate as a predictor
of the future spot rate. The...
4. Indiana Company expects to receive 5 million euros in one year from exports. It can...
4. Indiana Company expects to receive 5 million euros in one
year from exports. It can use any one of the following strategies
to deal with the exchange rate risk. Estimate the dollar cash flows
received as a result of using the following strategies:
a). unhedged strategy
b). money market hedge
c). option hedge
The spot rate of the euro as of today is $1.30. Interest rate
parity exists. Indiana Company uses the forward rate as a predictor
of the...
1. On January 1 2010, J Company lends M Company $20,000 with payment due in 5...
1. On January 1 2010, J Company lends M Company $20,000 with
payment due in 5 years. J Company calculates that present value of
the $20,000 is $13,612.
Required:
a) Prepare the journal entry for J Company on January 1,
2010.
b) Prepare an effective interest amortization table with 4
columns for J Company.
c) Prepare the journal entries for J Company on 31 December
2010, 2011, 2012, 2013, 2014 and 2015. Assume that M Companies
repays J Company promptly....
Dow Chemical has sold SFr 25 million in chemicals to Ciba-Geigy. Payment is due in 180...
Dow Chemical
has sold SFr 25 million in chemicals to Ciba-Geigy. Payment is due
in 180 days.
Spot
rate:
$0.7957/SFr
180-day forward
rate:
$0.8095/SFr
180-day U.S. dollar interest rate (annualized):
5%
180-day Swiss franc interest rate (annualized): 2%
180-day call option at
$0.80/SFr:
2% premium
180-day put option at
$0.80/SFr:
1% premium
a. What
is the hedged value of Dow’s receivable using the forward market
hedge?
b. Explain how Dow can use the
money...
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