In: Accounting
Pfizer is one of the leading pharmaceutical companies located in New York. The massive efforts of Pfizer's research and development team have led to the approval of Pfizer's COVID-19 vaccine. Pfizer just purchased a shipment of potassium chloride from Morocco for 8,300,000 dirhams, payable in three months. Pfizer's financial executive has collected the following information.
Pfizer's cost of capital (WACC) = 12.00%: Spot exchange rate, dirhams/$ = 9.20, Three-month forward rate, dirhams/$ = 9.70, Three-month interest rate for borrowing in United States = 6.00% per annum; Three month interest rate for borrowing in Morocco = 8.00% per annum; Three-month interest rate for investing in United States = 5.00% per annum; Three-month interest rate for investing in Morocco = 7.00% per annum.
How much is the cost of settlement using forward market hedge?
A) 855.670 Dirhams
B) $855,670
C) 902 174 Dirhams
D) $902,174
The option (B) is right option.
Explanation:
Pfizer is New York based company having home currency Dollars
Accounts payable in 3 Months = 8,300,000 Dirhams
Spot rate = 9.2 Dirhams per dollar
Forward rate = 9.7 Dirhams per dollar
If forward market hedge is used, Cost of settlement is
8,300,000 Dirhams / 9.7 Dirhams per dollar = 855,670 Dollars
Hence, the option (B) is right option.
Hence, the option (B) is right option.