KegsRUs buys specialized abbey beers from Belgian breweries and distributes them domestically. A payment for 10,000...
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Kegs"R"Us buys specialized abbey beers from Belgian breweries and distributes them domestically. A payment for 10,000 cases is due in 6 months at 20 per case. They have a contract with a domestic retailer, to which they will sell the imported beers at $27 per case in 6 months. They want to secure a profit margin of at least $3 per case in any exchange-rate scenario. Relevant quotes are given below (all rates are annualized). Dollar Euro Spot exchange rate: Interest rate (annual) 0.0400 (-4.00%) 0.0600 (-6.00%) 1.20 S/ Option premiums ($/): Strike ($/) 1.15 1.20 "Buy"/"Sell": Profit from sales: Call 0.041 (4.1) 0.028 (2.8) a) Compute the terminal spot rate at which the firm's profit goal is exactly met. S/ b) Compute the 6-month forward rate using a relevant parity condition. forward S/case Inflation rate (annual) 0.0000 (-0.00%) -0.0100 (-1.00%) S/ c) Suppose the firm hedges the exposure by a forward contract at the forward rate calculated above. How many euros should the firm buy or sell forward? Compute the final dollar profit per case after the beer sales to the distributor. Put 0.031 (3.1) 0.045 (4.5) Forward amount: euros Kegs"R"Us buys specialized abbey beers from Belgian breweries and distributes them domestically. A payment for 10,000 cases is due in 6 months at 20 per case. They have a contract with a domestic retailer, to which they will sell the imported beers at $27 per case in 6 months. They want to secure a profit margin of at least $3 per case in any exchange-rate scenario. Relevant quotes are given below (all rates are annualized). Dollar Euro Spot exchange rate: Interest rate (annual) 0.0400 (-4.00%) 0.0600 (-6.00%) 1.20 S/ Option premiums ($/): Strike ($/) 1.15 1.20 "Buy"/"Sell": Profit from sales: Call 0.041 (4.1) 0.028 (2.8) a) Compute the terminal spot rate at which the firm's profit goal is exactly met. S/ b) Compute the 6-month forward rate using a relevant parity condition. forward S/case Inflation rate (annual) 0.0000 (-0.00%) -0.0100 (-1.00%) S/ c) Suppose the firm hedges the exposure by a forward contract at the forward rate calculated above. How many euros should the firm buy or sell forward? Compute the final dollar profit per case after the beer sales to the distributor. Put 0.031 (3.1) 0.045 (4.5) Forward amount: euros
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ANSWER a To secure a profit margin of at least 3 per case KegsRUs needs to receive 27 20 3 4 per case in any exchangerate scenario Since the payment i... View the full answer
Related Book For
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
Posted Date:
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