Ganadothe

U.S.-based company discussed in this

chapterhas

concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of

3,000,000

is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at

14.465%

per annum (due to credit concerns of the British banks). Given the exchange rates and interest rates in the popup window,

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, compare alternate ways below that Ganado might hedge its foreign exchange transaction exposure. Assume a 360-day financial year.

a. How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the current spot rate of

$1.7567/?

The 90-day forward rate of

$1.7429/?

The expected spot rate of

$1.7994/?

b. How much in U.S. dollars will Ganado receive in 90 days with a forward market hedge?

c. How much in U.S. dollars will Ganado receive in 90 days with a money market hedge?

d. How much in U.S. dollars will Ganado receive in 90 days with an option market hedge?

e. What transaction exposure hedge is now in Ganado's best interest?

How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the current spot rate of

$1.7567/?

$enter your response here

(Round to the nearest dollar.)

How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the 90-day forward rate of

$1.7429/?

$enter your response here

(Round to the nearest dollar.)

How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the expected spot rate of

$1.7994/?

$enter your response here

(Round to the nearest dollar.)

b. How much in U.S. dollars will Ganado receive in 90 days with a forward market hedge?

$enter your response here

(Round to the nearest dollar.)

c. How much in U.S. dollars will Ganado receive in 90 days with a money market hedge?

$enter your response here

(Round to the nearest dollar.)

d. How much in U.S. dollars will Ganado receive in 90 days if Ganado covers the transaction exposure with the

$1.7400/

put option and the pound depreciates below

$1.7400/

in 90 days?

$enter your response here

(Round to the nearest dollar.)

How much in U.S. dollars will Ganado receive in 90 days if Ganado covers the transaction exposure with the

$1.7100/

put option and the pound depreciates below

$1.7100/

in 90 days?

$enter your response here

(Round to the nearest dollar.)

e. What transaction exposure hedge is now in Ganado's best interest?(Select from the drop-down menu.)

The

forward market hedge

option market hedge

money market hedge

unhedged position

guarantees Ganado the greatest dollar value for the accounts receivable when using the cost of capital as the reinvestment rate (carry-forward rate).

90-day A/R in pounds	3,000,000
Spot rate ($/)	$1.7567
90-day forward rate ($/)	$1.7429
3-month U.S. dollar investment rate	6.788%
3-month U.S. dollar borrowing rate	8.548%
3-month U.K. investment interest rate	9.697%
3-month U.K. borrowing interest rate	14.465%
Ganado's WACC	12.282%
Expected spot rate in 90 days ($/)	$1.7994
Put options on the British pound:
Strike rate ($/)	$1.7400
Put option premium	1.5%
Strike rate ($/)	$1.7100
Put option premium	1.0%