Problem 10.14 Micca Metals, Inc. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment applications in many industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for 6,000,000, dirhams, payable in six months. Six-month call options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available from Bank Al-Maghrub at a premium of 2%. Six-month put options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available at a premium of 3%. Compare and contrast alternative ways that Micca might hedge its foreign exchange transaction exposure. What is your recommendation? Assumptions Shipment of phosphates from Morocco, Moroccan dirhams Micca's cost of capital (WACC) Spot exchange rate, dirhams/$ Six-month forward rate, dirhams/$ Values 6,000,000 14.000% 10.00 10.40 Options on Moroccan dirhams: Strike price, dirhams/$ Option premium (percent) Call Option 10.00 2.000% Put Option 10.00 3.000% Six-month interest rate for borrowing (per annum) Six-month interest rate for investing (per annum) United States 6.000% 5.000% Morocco 8.000% 7.000% Risk Management Alternatives Values Certainty 1. Remain uncovered, making the dirham payment in six months at the spot rate in effect at that date 2. Forward market hedge. Buy dirhams forward six months. 3. Money market hedge. Exchange dollars for dirhams now, invest for six months. 4. Call option hedge. (Need to buy dirhams = call on dirhams)