Problem 16.2 Nikken Microsystems (B)
Assume that Nikken Microsystems prefers to receive U.S. dollars rather than euros for the trade transaction described in problem 1. It is considering two alternatives:1) It can sell the acceptance for euros at once and convert the euros immediately to U.S. dollars at the spot rate of exchange of $1.00/; or 2) It can hold the euro acceptance until maturity but at the start sell the expected euro proceeds forward for dollars at the 3-month forward rate of $1.02/.
a. What are the U.S. dollar net proceeds received at once from the discounted trade acceptance in alternative 1?
b. What are the U.S. dollar net proceeds received in 3 months in alternative 2?
c. What is the breakeven investment rate that would equalize the net U.S. dollar proceeds from both alternatives?
d. Which alternative should Nikken Microsystems choose?