Trident's Transaction Exposure Trident sells equipment to a British firm, Regency, for 1m. The sale is...

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Trident's Transaction Exposure Trident sells equipment to a British firm, Regency, for £1m. The sale is large in relation to total sales; it is made in March for payment three months later. CFO would be very happy if the £ appreciated against the $ but is concerned it might fall. She budgets the minimum acceptable margin is at sales price of $1.7m. She has collected the following financial and market information for the analysis of her currency exposure problem: Budget rate (lowest acceptable FX rate): $1.70/E Spot rate: $1.7640/E 3-month forward rate: $1.7540/£ Trident's cost of capital: 12.0% p.a. UK 3-month borrowing rate: 10.0% p.a. (or 2.5% per quarter) -UK 3-month investment rate: 8.0% p.a. (or 2.0% per quarter) US 3-month borrowing rate: 8.0 % p.a. (or 2.0% per quarter) US 3-month investment rate: 6.0% p.a. (or 1.5% per quarter) . . June put option in the over-the-counter (bank) market for £1m; strike price $1.75; 1.5% premium June call option in the over-the-counter (bank) market for £1m; strike price $1.75; 1.5% premium Prever 100% sure Trident's foreign exchange advisory service forecast of 3-month future spot rate: $1.76/E . Risk exposure of Trident if it does not hedge? Compare forward hedge, money market hedge and option hedge. Conclude about which one is the best hedge if the advisor is right. Trident's Transaction Exposure Trident sells equipment to a British firm, Regency, for £1m. The sale is large in relation to total sales; it is made in March for payment three months later. CFO would be very happy if the £ appreciated against the $ but is concerned it might fall. She budgets the minimum acceptable margin is at sales price of $1.7m. She has collected the following financial and market information for the analysis of her currency exposure problem: Budget rate (lowest acceptable FX rate): $1.70/E Spot rate: $1.7640/E 3-month forward rate: $1.7540/£ Trident's cost of capital: 12.0% p.a. UK 3-month borrowing rate: 10.0% p.a. (or 2.5% per quarter) -UK 3-month investment rate: 8.0% p.a. (or 2.0% per quarter) US 3-month borrowing rate: 8.0 % p.a. (or 2.0% per quarter) US 3-month investment rate: 6.0% p.a. (or 1.5% per quarter) . . June put option in the over-the-counter (bank) market for £1m; strike price $1.75; 1.5% premium June call option in the over-the-counter (bank) market for £1m; strike price $1.75; 1.5% premium Prever 100% sure Trident's foreign exchange advisory service forecast of 3-month future spot rate: $1.76/E . Risk exposure of Trident if it does not hedge? Compare forward hedge, money market hedge and option hedge. Conclude about which one is the best hedge if the advisor is right.

Answer rating: 100% (QA)

Risk Exposure Without Hedge Tridents risk exposure without a hedge is the potential loss if the pound depreciates against the dollar from the budget r... View the full answer