15. Problem 10.4 P & G India - A/P Proctor and Gamble's affiliate in India, P...
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15. Problem 10.4 P & G India - A/P Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge a 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like P & G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy. Use cost of capital for FV calculation. Assumptions 180-day account payable, Japanese yen () Spot rate (/S) Spot rate, rupees/dollar (Rs/S) Implied (calculated) spot rate (/Rs) 180-day forward rate (\/Rs) Values 8,500,000 120.60 47.75 2.5257 2.4000 Expected spot rate in 180 days (/Rs) 2.6000 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agent's exchange rate fee 4.850% P & G India's cost of capital 12.00% 15. Problem 10.4 P & G India - A/P Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge a 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like P & G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy. Use cost of capital for FV calculation. Assumptions 180-day account payable, Japanese yen () Spot rate (/S) Spot rate, rupees/dollar (Rs/S) Implied (calculated) spot rate (/Rs) 180-day forward rate (\/Rs) Values 8,500,000 120.60 47.75 2.5257 2.4000 Expected spot rate in 180 days (/Rs) 2.6000 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agent's exchange rate fee 4.850% P & G India's cost of capital 12.00%
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