Question 3 (Question total: 20 marks) Davie Krocket Inc. is an MNE with its holding company...
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Question 3 (Question total: 20 marks) Davie Krocket Inc. is an MNE with its holding company located in Kentucky, USA. It has a Swiss subsidiary which has declared a dividend of five million Swiss francs (SFr's), payable in three months from Switzerland to the holding company in Kentucky. The Chief Financial Officer of the holding company is considering hedging this transaction. The following quotes are available from the Union Bank of Switzerland. (3) Spot exchange rate (4) Expected spot rate in 3 months (5) 3-month forward rate SFr1.2462/USD SFr1.2200/USD SFr1.2429/USD (6) 3-month SFr interest rate (7) 3-month USD interest rate 3.75% per annum 4.00% per annum (8) 3-month put option or SFr at strike price of SFr1.2500/USD, premium of USD0.0150/SFr. (9) Davie Krocket Inc's weighted average cost of capital, 9.80% per annum. a) What are the costs of each alternative for hedging the dividend payable? Show all calculations. (10 marks) Question 3 (Question total: 20 marks) Davie Krocket Inc. is an MNE with its holding company located in Kentucky, USA. It has a Swiss subsidiary which has declared a dividend of five million Swiss francs (SFr's), payable in three months from Switzerland to the holding company in Kentucky. The Chief Financial Officer of the holding company is considering hedging this transaction. The following quotes are available from the Union Bank of Switzerland. (3) Spot exchange rate (4) Expected spot rate in 3 months (5) 3-month forward rate SFr1.2462/USD SFr1.2200/USD SFr1.2429/USD (6) 3-month SFr interest rate (7) 3-month USD interest rate 3.75% per annum 4.00% per annum (8) 3-month put option or SFr at strike price of SFr1.2500/USD, premium of USD0.0150/SFr. (9) Davie Krocket Inc's weighted average cost of capital, 9.80% per annum. a) What are the costs of each alternative for hedging the dividend payable? Show all calculations. (10 marks)
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