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

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

Solutions

Expert Solution

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.

Junaid answered 1 year ago

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