Question: You source Ice Cubes to sell in the US from an Eskimo village and you owe them 4,000,000 Danish Kronas (DKK), which is due in
You source Ice Cubes to sell in the US from an Eskimo village and you owe them 4,000,000 Danish Kronas (DKK), which is due in 60 days. If the currency exchange rates and interest rates are as follows (see Data Table #1), what is your hedging decision?
You have to explore each hedging alternative (by answering questions below) and choose the best one.
In all question use 360 as a number of days in a year.
| Amount (to be paid in DKK) | 4,000,000 |
| Days | 60 |
| Spot (DKK/$) | 5.4200 |
| Expected FX rate in 60 days (DKK/$) | 5.4020 |
| Forward premium (+) or discount (-) on DKK | 3% |
| CALL Option Premium | 2% |
| PUT Option Premium | 3% |
| CALL Strike Price (DKK/$) | 5.8400 |
| PUT Strike Price (DKK/$) | 5.8400 |
| US borrowing rate | 5% |
| US investing rate | 3% |
| Danish borrowing rate | 7% |
| Danish investing rate | 4% |
| Your Cost of Capital (WACC) | 15% |
1. If you choose to Remain Unhedged, how much will you have to pay in USD, (Round your answer to 2 decimals).
2. Compute the 60-day forward rate of DKK per 1 USD (DKK/$) using the forward premium.
3. Find how much you will have to pay in 60 days in USD, if you choose to hedge in the forward market.
4. If you decide to hedge AP in the money market, find the amount you need to invest today in DKK.
5. If you decide to hedge AP in the money market, compute how much USD you will need today to buy DKK needed for the investment.
6.If you decide to hedge AP in the money market, find how much you will have to pay in 60 days in USD.
7.If you decide to hedge AP with options, calculate the cost of the option (premium) in USD today.
8. If you exercise the option at a strike price, how much USD will you spend for the needed amount of DKK?
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