Kansas Corporation, an American company, has a payment of 6.6 million due to Tuscany Corporation one...

Transcribed Image Text:

Kansas Corporation, an American company, has a payment of 6.6 million due to Tuscany Corporation one year from today. At the prevailing spot rate of 0.90 /$, this would cost Kansas $7,333,333, but Kansas faces the risk that the /$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 Is to buy 6.6 million forward today at a one-year forward rate of 0.89 /$. Strategy 2 is to pay a premium of $116,000 for a one-year call option on 6.6 million at an exchange rate of 0.88 /$. a. Suppose that in one year the spot exchange rate is 0.85 /$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount Strategy 1 Strategy 2 Net Dollar Cost b. Suppose that in one year the spot exchange rate is 0.95 /$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount. Strategy Strategy 2 Net Dollar Cost Kansas Corporation, an American company, has a payment of 6.6 million due to Tuscany Corporation one year from today. At the prevailing spot rate of 0.90 /$, this would cost Kansas $7,333,333, but Kansas faces the risk that the /$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 Is to buy 6.6 million forward today at a one-year forward rate of 0.89 /$. Strategy 2 is to pay a premium of $116,000 for a one-year call option on 6.6 million at an exchange rate of 0.88 /$. a. Suppose that in one year the spot exchange rate is 0.85 /$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount Strategy 1 Strategy 2 Net Dollar Cost b. Suppose that in one year the spot exchange rate is 0.95 /$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount. Strategy Strategy 2 Net Dollar Cost