A US multinational is expecting a payment from Cayman Islands in one year. The amount is KYD
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Question:
A US multinational is expecting a payment from Cayman Islands in one year. The amount is KYD 1,000,000 in Cayman Island dollars. | ||||||
a. The expected spot prices to prevail at the end of the year range from $1.14 to $1.26. The following information is available: | ||||||
1. Spot rate | $1.20/KYD | |||||
2. 6-month forward rate | $1.15/KYD | |||||
3. Interest rate in US | 2.00% | |||||
4. Interest rate Cayman Islands | 9.00% | |||||
5. Call option premium | $0.12 | per US dollar | E=$1.20 | |||
Put Option premium | $0.14 | per US dollar | E=$1.20 | |||
Premium is to be based on foreign currency expressed in US dollars. | ||||||
Show how the company can hedge using the forward hedge, money market hedge and options hedge. Which hedge would you recommend? | ||||||
b. | ||||||
A company has bid for a large project in Germany. The results will be announced in 3 months. | ||||||
If it wins the contract, it is expected to make a performance payment of $50 million to the German government. The spot rate for the Euro is $0.80/€. | ||||||
1. Should the company be worried about the dollar appreciating or depreciating? | ||||||
2. How can the company hedge the payment using options? | ||||||
3. Show the expected payoffs if the Euro is $0.90/€ and $0.70/€ at the end of the three months. Ignore premiums. |
Related Book For
Fundamentals of Physics
ISBN: 978-1118230725
10th Extended edition
Authors: Jearl Walker, Halliday Resnick
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