(GUN) manufactures gold jewelry in India from gold imported using contracts denominated in USD. Presently the...

 

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(GUN) manufactures gold jewelry in India from gold imported using contracts denominated in USD. Presently the company has no hedging strategy for its market risks. It plans to buy a significant quantity of gold after 3 months. The following is the data regarding risk-free interest rates and expected inflation for India an US over the next 3 months. (These are rates estimated on quarterly basis from annual rates). India US Interest rate on 91 day T-Bills 0.008 0.001 0.012 0.005 Expected inflation (3 month) The following are the INR/USD currency rates quoted by Jojoba Bank for importers: Forward Rate (INR per unit of foreign currency) 1 month 3 months 6 months 74.01 74.44 75.39 USD Spot Rate 72.97 The following are the spot rate and futures and options contracts available on gold from the commodity exchange: Premium (Rs/10 mg) Spot Futures (3 months expiry) Call Option (3 months expiry) Put Option (3 months expiry) Rates (Rs/10 mg) 49,700 50, 230 49,400 49,800 1,500 1,300 What is the foreign currency risk faced by GUN? How can the company hedge its foreign currency risk with the help of Jojoba Bank? Calculate and confirm whether the gold futures are correctly priced, based on the given data, and assuming that storage costs and convenience yield are negligible? If GUN uses appropriate option contracts to hedge and gold price declines to Rs 48,000/10 mg after 3 months what will be the company's effective cost of buying gold per 10 mg? (GUN) manufactures gold jewelry in India from gold imported using contracts denominated in USD. Presently the company has no hedging strategy for its market risks. It plans to buy a significant quantity of gold after 3 months. The following is the data regarding risk-free interest rates and expected inflation for India an US over the next 3 months. (These are rates estimated on quarterly basis from annual rates). India US Interest rate on 91 day T-Bills 0.008 0.001 0.012 0.005 Expected inflation (3 month) The following are the INR/USD currency rates quoted by Jojoba Bank for importers: Forward Rate (INR per unit of foreign currency) 1 month 3 months 6 months 74.01 74.44 75.39 USD Spot Rate 72.97 The following are the spot rate and futures and options contracts available on gold from the commodity exchange: Premium (Rs/10 mg) Spot Futures (3 months expiry) Call Option (3 months expiry) Put Option (3 months expiry) Rates (Rs/10 mg) 49,700 50, 230 49,400 49,800 1,500 1,300 What is the foreign currency risk faced by GUN? How can the company hedge its foreign currency risk with the help of Jojoba Bank? Calculate and confirm whether the gold futures are correctly priced, based on the given data, and assuming that storage costs and convenience yield are negligible? If GUN uses appropriate option contracts to hedge and gold price declines to Rs 48,000/10 mg after 3 months what will be the company's effective cost of buying gold per 10 mg?

Answer rating: 100% (QA)

The foreign currency risk faced by GUN is the risk that the value of the USD will change between the ... View the full answer