Question
In: Accounting
Consider a UK-based importer of bicycles, Italian bicycles, who has a €160,000 payable due in one...
Consider a UK-based importer of bicycles, Italian bicycles, who has a €160,000 payable due in one year. He wants to use options to hedge the cost of his payable. One-year at-the-money put and call options on €10,000 exist. The spot exchange rates are €1.00 = $1.120 and £1.00 = $1.400, which makes the spot cross rate €1.00 = £0.80. In the next period, the euro can increase in pound value to £1.00/€1.00 or fall to £0.64/€1.00. The interest rate in dollars is i$ = 0%; the interest rate in euro is i€ = 5.00%; the interest rate in pounds is i£ = 7.10%. -How many at-the-money puts (on €10,000 strike price in £8,000) should he sell today? HINT: You should be able to verify that your hedge "works" if the exchange rate at time 1 is £1.00/€ or £0.64/€ i.e. you should have the same cash flow in either state.
Solutions
ekkarill92 answered 2 years agoRelated Solutions
Consider a UK-based importer of bicycles, Italian bicycles, who has a €160,000 payable due in one...
Consider a UK-based importer of bicycles, Italian bicycles, who
has a €160,000 payable due in one year. He wants to use options to
hedge the cost of his payable. One-year at-the-money put and call
options on €10,000 exist. The spot exchange rates are €1.00 =
$1.120 and £1.00 = $1.400, which makes the spot cross rate €1.00 =
£0.80. In the next period, the euro can increase in pound value to
£1.00/€1.00 or fall to £0.64/€1.00. The interest rate in...
A. A Japanese importer has a $1,250,000 payable due in one year. Spot exchange rates are...
A.
A Japanese importer has a $1,250,000 payable due in one year.
Spot exchange rates are $1 per ¥100, 1-year forward rates are $1
per ¥120. The contract size is ¥12,500,000. Which strategy can
hedge his exchange rate risk?
Group of answer choices
Go long in dollar forward contracts.
Go short in dollar forward contracts.
Go long in yen forward contracts.
none of the options
B.
A counterparty may use a currency swap
Group of answer choices
to obtain debt...
An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. The...
An importer of Swiss watches has an account payable of
CHF750,000 due in 90 days. The following data is available:
Rates and prices in US-cents/CHF.
Spot rate: 71.42 cents/CHF
90-day forward rate: 71.14
cents/CHF
US –dollar 90-day interest rate: 3.75%
per year
Swiss franc 90-day interest rate:
5.33% per year
Option Data in cents/CHF
_______________________________
Strike
Call
Put
70
2.55
1.42
72
1.55
2.40
_______________________________
Assess the USD cost to the importer in 90 days if it uses a...
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) $1.52/euro
Firm ABC is a UK based retailer and Firm XYZ is an Italian manufacturer. Firm ABC...
Firm ABC is a UK based retailer and Firm XYZ is an Italian
manufacturer.
Firm ABC is planning to open a number of retail stores in France
and wants to borrow €60 million for 4 years to fund this.
Firm XYZ has an opportunity to acquire a competitor located in
the UK and wishes to borrow ₤50 million for 4 years to fund this
acquisition.
The current spot FX rate is S(EUR/GBP)=1.20. The annual
borrowing rates available to the firms...
10) Consider that in the UK inflation and interest rates are expected to decline due to...
10) Consider that in the UK inflation and interest rates are
expected to decline due to Brexit while in the US it both will rise
due to full employment and Fed policy. Explain how the
international trade flows should initially adjust in response to
the changes in inflation (holding exchange rates constant). Explain
how the international capital flows should adjust in response to
the changes in interest rates (holding exchange rates
constant).
A U.S. company has a ¥750 million payable due in one year to a bank in...
A U.S. company has a ¥750 million payable due in one year to a
bank in Japan. The current spot rate S($/¥) = $0.0086/¥ and the
one-year forward rate F360($/¥) = $0.0092/¥. The annual interest
rate is 3 percent in Japan and 6 percent in the United States.
a. How to implement a hedge using a forward contract? Compute
the guaranteed dollar payment in one year using the forward
hedge.
b. How to implement a money market hedge? Compute the...
A US importer who owes and Belgian company 500,000 Euros payable in 30 days from today...
A US importer who owes and Belgian company 500,000 Euros payable
in 30 days from today expects that the US Dollar will weaken during
this period. What would you advise the importer to
do? What would happen if the imported took your advice
yet instead of the dollar weakening, the dollar actually
strengthened??
You are UK company, 200,000 US$ payable to US in one year. Answer in terms of...
You are UK company, 200,000 US$ payable to US in one year.
Answer in terms of BP (British Pound). Round at four decimal places
Examples: 1.23487 ---> 1.2349; 1.23533 --> 1.2353 Information
for Forward Contract: Forward exchange rate (one yr): 0.7124 BP/$
Information for Money Market Instruments (MMI): Current exchange
rate: 0.7173 BP/$ Investment return at JP Morgan (in US): 5% annual
Interest rate of borrowing from HSBC (UK): 3% annual Information
you need for Currency Options Contract: Exercise options...
2) Company A is based in UK and has a subsidiary in the US that requires...
2) Company A is based in UK and has a subsidiary in the US that
requires funding in USD. It decides to enter into a currency swap
agreement with company B in US. Company A will pay 5% on a Sterling
principal of £10,000,000 and receive 6% on a US$ principal of
$15,000,000 every year for the next 3 years. The current exchange
rate is $1.5 USD per UK Sterling. Question: a) Explain and
calculate the cash flow exchanges at...
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