(GUN) manufactures gold jewelry in India from gold imported using contracts denominated in USD. Presently the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
(GUN) manufactures gold jewelry in India from gold imported using contracts denominated in USD. Presently the company has no hedging strategy for its market risks. It plans to buy a significant quantity of gold after 3 months. The following is the data regarding risk-free interest rates and expected inflation for India an US over the next 3 months. (These are rates estimated on quarterly basis from annual rates). India US Interest rate on 91 day T-Bills 0.008 0.001 0.012 0.005 Expected inflation (3 month) The following are the INR/USD currency rates quoted by Jojoba Bank for importers: Forward Rate (INR per unit of foreign currency) 1 month 3 months 6 months 74.01 74.44 75.39 USD Spot Rate 72.97 The following are the spot rate and futures and options contracts available on gold from the commodity exchange: Premium (Rs/10 mg) Spot Futures (3 months expiry) Call Option (3 months expiry) Put Option (3 months expiry) Rates (Rs/10 mg) 49,700 50, 230 49,400 49,800 1,500 1,300 What is the foreign currency risk faced by GUN? How can the company hedge its foreign currency risk with the help of Jojoba Bank? Calculate and confirm whether the gold futures are correctly priced, based on the given data, and assuming that storage costs and convenience yield are negligible? If GUN uses appropriate option contracts to hedge and gold price declines to Rs 48,000/10 mg after 3 months what will be the company's effective cost of buying gold per 10 mg? (GUN) manufactures gold jewelry in India from gold imported using contracts denominated in USD. Presently the company has no hedging strategy for its market risks. It plans to buy a significant quantity of gold after 3 months. The following is the data regarding risk-free interest rates and expected inflation for India an US over the next 3 months. (These are rates estimated on quarterly basis from annual rates). India US Interest rate on 91 day T-Bills 0.008 0.001 0.012 0.005 Expected inflation (3 month) The following are the INR/USD currency rates quoted by Jojoba Bank for importers: Forward Rate (INR per unit of foreign currency) 1 month 3 months 6 months 74.01 74.44 75.39 USD Spot Rate 72.97 The following are the spot rate and futures and options contracts available on gold from the commodity exchange: Premium (Rs/10 mg) Spot Futures (3 months expiry) Call Option (3 months expiry) Put Option (3 months expiry) Rates (Rs/10 mg) 49,700 50, 230 49,400 49,800 1,500 1,300 What is the foreign currency risk faced by GUN? How can the company hedge its foreign currency risk with the help of Jojoba Bank? Calculate and confirm whether the gold futures are correctly priced, based on the given data, and assuming that storage costs and convenience yield are negligible? If GUN uses appropriate option contracts to hedge and gold price declines to Rs 48,000/10 mg after 3 months what will be the company's effective cost of buying gold per 10 mg?
Expert Answer:
Answer rating: 100% (QA)
The foreign currency risk faced by GUN is the risk that the value of the USD will change between the ... View the full answer
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Posted Date:
Students also viewed these economics questions
-
An investor plans to buy a common stock and hold it for four years. The investor expects to receive $2 in dividend a year and $26 from the sales of the stock at the end of year 4. If the investor...
-
Refer to Practice 9-8. Assume that the company has no expenses except for cost of goods sold, the selling price per unit is $6 in each year, and that the income tax rate is 40%. Compute the total...
-
Refer to Practice 9-8. Assume that the company has no expenses except for cost of goods sold, the selling price per unit is $5 in each year, and that the income tax rate is 40%. Compute the total...
-
Write a brief paper on the following topic: "Why have gasoline prices risen so high in the recent years?" Write down the reasons and divide into supply and demand effects on the market. Describe the...
-
You have just won the lottery. You will receive $ 2,500,000 today, and then receive 40 payments of $ 1,250,000. These payments will start one year from now and will be paid every six months. A...
-
The table gives the winning heights in the pole vault in the Olympic Games from 1980 to 2012. (A) Use a graphing calculator to find the least squares line for the data, letting x = 0 for 1980. (B)...
-
Fill in the Blank. Phase marks are used in ____________ plane balancing using a vibration analyzer.
-
A nutrition plan app has a subscription that costs $10/month. The following chart gives average historical renewal rates for subscribers based on how many months they have been a subscriber. Month 1...
-
Explain how culture can be used to generate a competitive advantage in a multinational organization.?
-
The towline exerts a force of P = 4 kN at the end of the 20-m-long crane boom. If x = 25 m, determine the position ? of the boom so that this force creates a maximum moment about point O. What is...
-
A shaft simply supported by a truncated conical pivot bearing that carries an axial load at its center and the cone angle is 120. The axial load on the bearings is 3kN. The shaft speed is 1440 rpm...
-
Q.1: Determine the net force acting on each of the following objects. In each case assume that all forces acting on the object are given. K (a) At an instant when a soccer ball is slightly off the...
-
Consider Arizona Microbrewery, Inc. ( AMI ) from Session # 6 . Suppose AMI has 1 0 0 incremental machine hours available to produce beers. By how much does total contribution margin increase from...
-
Man - A - Shev - Its manufactures decorative iron railings. In preparing for 2 0 2 4 s operations, management has developed the following estimates: Total Per UnitSales ( 2 0 , 0 0 0 units ) $ 1 , 0...
-
Four different types of calculating depreciation expense have been introduced along with their impacts on "Income Tax" and / or on "Cash Flows" from Operating Activities. Which one of the following...
-
Mason Company provided the following data for this year: Sales Direct labor cost Raw material purchases Selling expenses Administrative expenses Manufacturing overhead applied to work in process...
-
M Gmail Ba H&M Cc YouTube 37F Mostly clear Presentation1.pptx Ni M Ca UI sit.instructure.com/courses/62456/assignments/368020 Maps a Returns & Orders in LinkedIn India: Log... ht SAI SW SW Sht Sht...
-
Match the following. Answers may be used more than once: Measurement Method A. Amortized cost B. Equity method C. Acquisition method and consolidation D. Fair value method Reporting Method 1. Less...
-
Why wouldnt China Eastern Airlines purchase the planes if they were obviously needed for the companys operations?
-
Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352 million for...
-
You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividend of $2.25 per share. You will receive a $2.40 dividend two years from now. You will sell the stock for $65...
-
Show from combination of the equation for current and the flux expression that the conductivity of an electrolyte solution is given by \[\kappa=\frac{F^{2}}{R_{\mathrm{G}} T} \sum_{i}^{N} D_{i}...
-
Verify by inputting the various constants that \(R_{\mathrm{G}} T / F\) is equal to \(k_{\mathrm{B}} T / e\).
-
When there is a concentration gradient in the system, show that the potential gradient is composed of two terms, (i) an Ohm's-law contribution and (ii) a diffusional contribution. State the equation...
Study smarter with the SolutionInn App