3. (a) Maendeleo Co., a U.S. firm plans to use a money market hedge to hedge...
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3. (a) Maendeleo Co., a U.S. firm plans to use a money market hedge to hedge its payment of 5 million Australian dollars for Australian goods in one year. The U.S interest rate is 6 percent, while the Australian interest rate is 10 percent. The spot rate of the Australian dollar is $0.96, while the one year-forward rate is $0.84. (i) Determine the amount of U.S. dollars needed in one year if a money market hedge is used (3 points). (!!) Using the information in the previous question, would Maendeleo Co. be better off hedging the payables with a money market hedge or with a forward hedge? (3 points). (b) Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won8,000 million. Won2,000 million has already been paid, and the remaining Won6,000 million is due in six months. The current spot rate is Won1,210/$, and the 6-month forward rate is Won1,275/$. The six-month Korean won interest rate is 18% per annum, the six-month US dollar rate is 6% per annum. Bobcat can invest at these interest rates or borrow at 3% per annum above those rates. A six-month call option on won with a 1400/$ strike rate has a 4.0% premium, while the six-month put option at the same strike rate has a 3.4% premium. Bobcat can invest at the rates given above or borrow at 2% per annum above those rates. Bobcat's weighted average cost of capital is 12%. Required: (i) Illustrate, with detailed computations, alternate ways that Bobcat might deal with its foreign exchange exposure (20 points). (ii) Which alternative method do you recommend, and why? (4 points). 3. (a) Maendeleo Co., a U.S. firm plans to use a money market hedge to hedge its payment of 5 million Australian dollars for Australian goods in one year. The U.S interest rate is 6 percent, while the Australian interest rate is 10 percent. The spot rate of the Australian dollar is $0.96, while the one year-forward rate is $0.84. (i) Determine the amount of U.S. dollars needed in one year if a money market hedge is used (3 points). (!!) Using the information in the previous question, would Maendeleo Co. be better off hedging the payables with a money market hedge or with a forward hedge? (3 points). (b) Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won8,000 million. Won2,000 million has already been paid, and the remaining Won6,000 million is due in six months. The current spot rate is Won1,210/$, and the 6-month forward rate is Won1,275/$. The six-month Korean won interest rate is 18% per annum, the six-month US dollar rate is 6% per annum. Bobcat can invest at these interest rates or borrow at 3% per annum above those rates. A six-month call option on won with a 1400/$ strike rate has a 4.0% premium, while the six-month put option at the same strike rate has a 3.4% premium. Bobcat can invest at the rates given above or borrow at 2% per annum above those rates. Bobcat's weighted average cost of capital is 12%. Required: (i) Illustrate, with detailed computations, alternate ways that Bobcat might deal with its foreign exchange exposure (20 points). (ii) Which alternative method do you recommend, and why? (4 points).
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