On October 1st 2010, a US pharmaceutical company exporting to the UK knows that has an...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
On October 1st 2010, a US pharmaceutical company exporting to the UK knows that has an account receivable of £500,000 due on Friday, March 19th 2011. The following data is available: Spot rate (US cents per British pound): 158.34 170-day forward day (US cents per British pound): 158.05 US dollar 170-day interest rate: 0.20% p.a. British pound 170-day interest rate: 0.40% p.a. Option data for March contracts in c/E: Strike Call Prions Pat Prices 158 3.00 4.81 150 4.52 533 160 4.08 SH all in US cents per GBP This company would like to understand the different options to hedge this transaction using forward and options. a) What transaction will this company do to hedge using forwards? What will be the revenue that it will obtain in March? b) If this company uses options, what transaction will it do if it chooses a strike price of 158 cents per pound? 2 c) What would be the upfront cost that this company pays for the option in October 2010? d) Under which condition, the company will exercise the option? What would be the minimum off that it would receive? What would be the minimum net revenue that it will receive? pay e) Use a graph to illustrate the unhedged position, the forward and the option. f) What is the value of the exchange rate that would make the firm be indifferent between the option and the forward? On October 1st 2010, a US pharmaceutical company exporting to the UK knows that has an account receivable of £500,000 due on Friday, March 19th 2011. The following data is available: Spot rate (US cents per British pound): 158.34 170-day forward day (US cents per British pound): 158.05 US dollar 170-day interest rate: 0.20% p.a. British pound 170-day interest rate: 0.40% p.a. Option data for March contracts in c/E: Strike Call Prions Pat Prices 158 3.00 4.81 150 4.52 533 160 4.08 SH all in US cents per GBP This company would like to understand the different options to hedge this transaction using forward and options. a) What transaction will this company do to hedge using forwards? What will be the revenue that it will obtain in March? b) If this company uses options, what transaction will it do if it chooses a strike price of 158 cents per pound? 2 c) What would be the upfront cost that this company pays for the option in October 2010? d) Under which condition, the company will exercise the option? What would be the minimum off that it would receive? What would be the minimum net revenue that it will receive? pay e) Use a graph to illustrate the unhedged position, the forward and the option. f) What is the value of the exchange rate that would make the firm be indifferent between the option and the forward?
Expert Answer:
Answer rating: 100% (QA)
a To hedge using forwards the company will sell GBP 500000 at the 170day forward rate of 15805 cents ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0071339476
Volume 1, 6th Edition
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I
Posted Date:
Students also viewed these finance questions
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
After attending a seminar on measuring customer profitability, Mason Ford decided to examine Olson Optics' customers to determine if the company truly knew how profitable its customers were. Olson...
-
Determine the moment of inertia of the area about the yaxis. to
-
For each of the following sets of numbers, calculate a \(95 \%\) confidence interval for the mean ( \(\sigma\) not known); before going through the steps in calculating the confidence interval, the...
-
The home appliance company decides to perform additional design work on the proposed air purifier. (a) The \(\mathrm{PtTiO}_{2}\) coated HEPA filter is expected to be easily clogged by particulates...
-
For diagrams (a)-(d), compute the unknown values: B, C, V, x, respectively, using the minimum number of compound interest factors. 200 200 200 200 100 100 100 -:- -2-3- -4 -2-3-4- i- 10% i= 10% (h)...
-
Helix Corporation uses the weighted-average method of process costing. It produces prefabricated flooring in a series of steps carried out in production departments. All of the material used in the...
-
An alphabetical list of the adjusted trial balance accounts for North Country Rentals after its first year of operations ending March 31, 2020, is shown below: Required 1. Calculate the capital...
-
f. What is the regular payback period for these two projects? Project A Intermediate calculation for payback Payback using intermediate calculations Project B WACC = Time period Cash flow Cumulative...
-
The agency relationship occurs when one or more individuals (principal) hire another individual (agent) to perform services on behalf of the principal. Discuss among your e-forum classmates on the...
-
What are the molecular mechanisms underlying genomic imprinting and parent-of-origin effects, and how do imprinted genes regulate fetal development, placental function, and postnatal growth, with...
-
Create a conceptual map where you apply the processes of cost and job order costing in the pharmaceutical industry.
-
Explain the basis of privacy law in Canada (include Constitutional law, quasi-constitutional law, and major statutes) ?
-
Not every case subject to review by a court is a case involving constitutional law. Why? How can a court determine when a case involves constitutional law? How can a legal researcher make that...
-
Let f(x)= 1 2x + 3 Then lim h->0 f(h)-f(0) h
-
Prove that if Σ an is absolutely convergent, then a. an
-
For what purpose are assets separated into components and depreciated by component?
-
A company repaid a loan for $ 75,000, but borrowed another $ 82,000. The balance in the loan account therefore increased by $ 7,000 during the year. How would these events be reflected on the SCF?...
-
What are unusual items? How might they be reported on the income statement?
-
You are managing a pension fund with a goal of maximizing the long-term growth rate. There are three assets available. Asset 1 has a risk-free return of 5%. Assets 2 and 3 each are driven by...
-
Suppose there are \(n\) stocks. Each of them has a price that is governed by geometric Brownian motion. Each has \(v_{i}=15 \%\) and \(\sigma_{i}=40 \%\). However, these stocks are correlated, and...
-
The Dow Jones Industrial Average is an average of the prices of 30 industrial stocks with equal weights applied to all 30 stocks (but the sum of the weights is greater than 1). Occasionally (about...
Study smarter with the SolutionInn App