Question

In: Finance

Considering the calculations you have done so far, you need to attend to a number of...

Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in.

The first transaction is for the import of good quality wines from Australia, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in Australia informed you that the current cost of the wine that you want to import is AUD$2,500,000. The wine in Australia can be shipped to the United States immediately but you have three months to conduct payment.

The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Britain. The payment of £2,500,000 for the export to Britain will be received nine months from now.

You consider different transaction hedges, namely forwards, options, and money market hedges.

You are provided with the following quotes from your bank, which is an international bank with branches in all the countries:

Forward rates:

Currencies

Spot

3 month (90 days)

6 month (180 days)

9 month (270 days)

12 month (360 days)

$/£

1.30009

1.30611

1.31217

1.31825

1.32436

$/AUD

0.72390

0.72516

0.72641

0.72766

0.72892

Bank applies 360 day-count conventions to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Country

3 month rates

6 months rates

9 month rates

12 month rates

Borrow

Invest

Borrow

Invest

Borrow

Invest

Borrow

Invest

United States

2.687%

2.554%

2.713%

2.580%

2.740%

2.607%

2.766%

2.633%

Britain

0.786%

0.747%

0.794%

0.755%

0.801%

0.762%

0.809%

0.770%

Australia

1.973%

1.875%

1.992%

1.894%

2.012%

1.914%

2.031%

1.933%

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 7 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.

Option prices:

Currencies

3 month options

6 month options

Call option

Put option

Call option

Put option

Strike

Premium in $

Strike

Premium in $

Strike

Premium in $

Strike

Premium in $

$/£

$1.29961

$0.00383

$1.31268

$0.00383

$1.30564

$0.00381

$1.31876

$0.00381

$/AUD

$0.72155

$0.00690

$0.72843

$0.00690

$0.72279

$0.00688

$0.72969

$0.00688

Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.)

a. Calculate the cost of money market hedges for the import from Australia (Complete Table 3 on the separate answer sheet).

b. Determine the option types that you will consider based on the exchange rate quotes provided by your bank. Remember we will long or short the base currencies (in this case study the currencies that are not $) and the FV of premium cost is based on the borrowing cost of $ for the time period of the option. For example if it is a 3 month option, then the interest rate that should be applied is United States 3 month borrowing rate of 2.687%/4 = 0.67175%). Calculate the total cost of using options as hedging instrument for the imports from Australia (Complete Table 4 on the separate answer sheet).

Table 3: Australia import cost with money market hedge:

PV of foreign currency to be invested

Converted at spot to $ and to be borrowed

$ amount to be repaid after period

Exchange rate locked in with transaction

Show answers in this row:

Show your workings in the columns below the answers (Use 7th decimal rounding in workings)

Table 4: Australia import cost with option hedge:

Type of option (Call or put?)

Total premium cost for import

Total cost of option in $ (Strike plus premium)

Option hedge breakeven exchange rate

Show answers in this row:

Show your workings in the columns below the answers (use 7th decimal rounding in workings)

Total cost of option in $/ Total AUD value of transaction

Solutions

Expert Solution




PV of foreign currency to be invested Converted at spot to
$ and to be borrowed
$ amount to be repaid after period Exchange rate locked in with transaction
Show answers in this row: AUD 2,488,335.9254 $        1,801,306.3764 $                    1,813,406.6520 0.72536
Show your Applicable Discount rate for 3 months period = (1.875%/4) =0.46875%                          .                                                      Therefore,the PV of AUD to be invested in Australia for 3 months = 2,500,000 x(1/(l+0.0046875))= 2,488,335.9253499 AUD Applicable exchange rate for sport = 0.72390                                    .                                        Threfore, Converted AUD to $ = AUD 2,488,335.9254 x 0.72390 = $1,801,306.3763971 Applicable Premium rate for 3 months period = (2.687%/4) =0.67175%                                        .                                                      Therefore,the Future value of $ to be borrowed in US for 3 months = $1,801,306.3764 x(1+0.0067175)= $1,813,406.6519835 Effective Exchange rate in money market hedge = $1,813,406.6520 / AUD 2,500,000 = 0.7253627
workings in
the columns
below the
answers (Use
7th decimal
rounding in
workings)
Type of
option (Call or put?)
Total premium cost for import Total cost of option in $ (Strike plus premium) Option hedge breakeven exchange rate
Show answers in this row: Call Option Strike Price $0.72155 $                         17,365.8769 Total outflow = $1,821,240.8768750 or Per AUD Payment = $0.7285 $                          0.7285
Show your workings in the columns below the answers (use 7th decimal rounding in workings) Buy the call option strike price $0.72155 @ premium of $0.00690 as the importer require to pay Aud after 3-Months so call option is also after 3 -Months Total cost of premium is premium per AUD is $0.00690 so total cost = AUD 2,500,000 x $0.00690 = $17,250                                                     .                                                       Here premium is cost but we require to pay premium today so interest on that is also cost for impotor so cost = Premium x (1+interest for 3 months) = $17,250 (1+0.0067175) = $ 17,365.8768750                                      .                                            Per AUD premium = $0.00690 x (1+0.0067175) = 0.0069464 $ Out flow = AUD 2,500,000 x $0.72155 =$1,803,875                      Premium = $17,365.8768750             Total out flow = $1,803,875 + $17,365.8768750 = $1,821,240.8768750              Cost = Strike + Premium cost = $0.72155 + 0.0069464 = 0.7284964 Total cost of option in $/ Total AUD value of transaction= $1,821,240.8769 / AUD 2,500,000 = 0.7284964

In option table not properly define what require so i put data best of my understanding if any help require please comment i will help you.

Here option table is also not proper so i am taken below table as i understand for calculation.


Related Solutions

Considering the calculations you have done so far, you need to attend to a number of...
Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the...
Considering the calculations you have done so far, you need to attend to a number of...
Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the...
Considering the calculations you have done so far, you need to attend to a number of...
Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the...
Considering the calculations you have done so far, you need to attend to a number of...
Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from Australia, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in Australia informed you...
This is for AT&T: The analysis you have done so far might lead you to expect...
This is for AT&T: The analysis you have done so far might lead you to expect your company to operate with a particular kind of structure. What kind? To what extent does your organizations structure seem to fit with the characteristics of the organization’s technology? For example. Is the structure organic or mechanistic?
a. Panther Marine mangement is very impressed with the work you have done so far filling...
a. Panther Marine mangement is very impressed with the work you have done so far filling in for the regular accountant. They have reached there fiscal year end and now need your help creating the financial statements for the fiscal year ended June 30, 2017. b. Check figures are NOT available for part II. Financial statements have the following built-in check figures: 1. Balance sheet total assets must equal total liabilities and stockholder's equity 2. Statement of cash flows net...
As CEO of WeCare, I am happy with what we have done so far advancing patient...
As CEO of WeCare, I am happy with what we have done so far advancing patient safety. The Diagnostic Errors concern for us is being managed. Now it is time to look at a second concern and move closer to becoming a High-Reliability Organization. The next executive briefing concern that I want to have addressed – Internal Care Coordination. Communication seems to be a big piece of this, so I want us to understand what this means. What do we...
So far we far we have been discussing the advantages of HIT, but have not considered...
So far we far we have been discussing the advantages of HIT, but have not considered its disadvantages. Discuss at least three (3) of the disadvantages or challenges that can be encountered by adoption of the HIT, such as EHR (Electronic Health Record) or HIE (health Information Exchange).
She looked at my calculations and said they were wrong, so only the calculations need to...
She looked at my calculations and said they were wrong, so only the calculations need to be redone. So, you'd look at the Apple pdf.'s, and compare the numbers to my Apple calculations page, and recalculate. Be sure to keep the old answers there, and show recalculations in red For your second project, you will print the Income Statement and Balance Sheet of a real corporation and calculate ratios using financial items from them. Instructions: Print off the income statement...
Reflect on and relate to what you have learned so far in the course with respect...
Reflect on and relate to what you have learned so far in the course with respect to your ability to calculate gross domestic product and its impact on the economy’s business cycle, unemployment, and inflation; using gross domestic product formulate recommendations for a government’s role in achieving full employment in an economy.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT