Auron Inc, a US car manufacturing firm, expects to have cash inflow of 1 million in...

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Auron Inc, a US car manufacturing firm, expects to have cash inflow of £1 million in one year from exporting its products to the UK. Auron's directors are concerned about the exposure risk that they face from changes in the exchange rate between the US dollar and sterling (£). The spot exchange rate now is £1-$1.25, and the one-year forward exchange rate is £1-$1.20. One-year put options on sterling are available with an exercise price of $1.20 and a cost of $0.04 per £. The one-year interest rates (for either borrowing or depositing money) are 5.0% for sterling and 3.5% for the dollar. (a) Assume Auron chooses to buy put options to hedge its exposure risk from the cash flow of £1 million. What will be Auron's expected net receipt in dollars if the forecast spot exchange rate in one year is: (1) £1=$1.23 (probability 0.5); (ii) £1-$1.18 (probability 0.5)? 17 marke) Auron Inc, a US car manufacturing firm, expects to have cash inflow of £1 million in one year from exporting its products to the UK. Auron's directors are concerned about the exposure risk that they face from changes in the exchange rate between the US dollar and sterling (£). The spot exchange rate now is £1-$1.25, and the one-year forward exchange rate is £1-$1.20. One-year put options on sterling are available with an exercise price of $1.20 and a cost of $0.04 per £. The one-year interest rates (for either borrowing or depositing money) are 5.0% for sterling and 3.5% for the dollar. (a) Assume Auron chooses to buy put options to hedge its exposure risk from the cash flow of £1 million. What will be Auron's expected net receipt in dollars if the forecast spot exchange rate in one year is: (1) £1=$1.23 (probability 0.5); (ii) £1-$1.18 (probability 0.5)? 17 marke)

Answer rating: 100% (QA)

To calculate Aurons expected net receipt in dollars we need to consider the two scenarios provided a... View the full answer