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 one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $111,000 for a one-year call option on €6.1 million at an exchange rate of 0.88 €/$.

a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas’s net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.)

b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas’s net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.)

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

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...

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...

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...

Avicorp has a $ 10.3 million debt issue outstanding, with a 6.1 % coupon rate. The...

Avicorp has a $ 10.3 million debt issue outstanding, with a 6.1 % coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94 % of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40 % tax rate, what is its after-tax cost of debt? Note: Assume that the firm...

On March 1st 2017 American Company purchased a one-million Euro CD when one Euro = one...

On March 1st 2017 American Company purchased a one-million Euro CD when one Euro = one dollar. This 3 year 12% CD pays interest semi-annually to American Company on March 1st and September 1st. Additional information is as follows: 3/1/2017 1 Euro worth $1.00 9/1/2017 1 Euro worth $1.01 12/31/2017 1 Euro worth $1.04 3/1/2018 1 Euro worth $1.02 9/1/2018 1 Euro worth $0.99 12/31/2018 1 Euro worth $0.95 3/31/2019 1 Euro worth $0.90 9/1/2019 1 Euro worth $0.96 12/31/2019...

Dorman Industries has a new project available that requires an initial investment of $6.1 million. The...

Dorman Industries has a new project available that requires an initial investment of $6.1 million. The project will provide unlevered cash flows of $835,000 per year for the next 20 years. The company will finance the project with a debt-to-value ratio of .3. The company’s bonds have a YTM of 6.2 percent. The companies with operations comparable to this project have unlevered betas of 1.31, 1.24, 1.46, and 1.41. The risk-free rate is 3.2 percent, and the market risk premium...

A scheduled payment of $8,000 due in one year is to be replaced with two payments:...

A scheduled payment of $8,000 due in one year is to be replaced with two payments: the first due in 7 months and the second due in 22 months. Calculate the size of the two payments if the second payment is to be twice as large as the first payment, and money can earn 6% compounded monthly.

Your firm has receivables of NZD 4 Million due in one year. The following information applies:...

Your firm has receivables of NZD 4 Million due in one year. The following information applies: Current Spot Rate US Interest Rate New Zealand Interest Rate .53 6.5% 11.0% 1-year Put options with a strike price of .52 are available for a premium of .02. Suppose that IRP & IFE presently exist between the US and New Zealand. Specify your firm’s proceeds for each of the following situations: A Forward Hedge A Put Option Hedge An Unhedged Position A Money...

Bonaime, Inc., has 6.1 million shares of common stock outstanding. The current share price is $61.10,...

Bonaime, Inc., has 6.1 million shares of common stock outstanding. The current share price is $61.10, and the book value per share is $4.10. The company also has two bond issues outstanding. The first bond issue has a face value of $70.1 million, a coupon rate of 7.1 percent, and sells for 97.5 percent of par. The second issue has a face value of $35.1 million, a coupon rate of 6.6 percent, and sells for 96.5 percent of par. The...

A loan is repaid in nine equal annual installments. The first payment is due one year...

A loan is repaid in nine equal annual installments. The first payment is due one year after the loan is made. The effective annual interest rate is 5%. The total amount of interest paid in the third, fourth, and fifth payments combined is $3798. What is the total amount of principal repaid in the seventh, eighth, and ninth payments combined? Choices: Less than $13,600 At least $13,600, but less than $13,700 At least $13,700, but less than $13,800 At least...

Question