1) FHC Inc., a U.S. corporation, has an account payable due in 90 days. Use the following information to evaluate the optimal strategy of hedging its transactional exposure:
Amount to be paid = 1,000,000 Euros
Spot exchange rate = $1.32/Euro
Three-month forward rate = $1.28/Euro
MIB' s cost of capital = 12%
Euro 90-day borrowing interest rate = 10% p.a.
Euro 90-day investment interest rate = 8% p.a.
US$ 90-day borrowing interest rate = 8% p.a.
US$ 90-day investment interest rate = 6% p.a.
3-month put option on Euro strike price = $1.30
3-month Euro put option premium = 2%
3-month call option on Euro strike price = $1.30
3-month Euro call option premium = 1.5%
If FHC chooses to hedge the exposure using a Euro forward contract, the actual amount it will pay in three months will be $_________ (Note: Round your answer to the nearest dollar.)
2) OHC Inc., a U.S. corporation, has an account payable due in 90 days. Use the following information to evaluate the optimal strategy of hedging its transactional exposure:
Amount to be paid = 1,000,000 Euros
Spot exchange rate = $1.33/Euro
Three-month forward rate = $1.29/Euro
OHC' s cost of capital = 12%
Euro 90-day borrowing interest rate = 10% p.a.
Euro 90-day investment interest rate = 8% p.a.
US$ 90-day borrowing interest rate = 8% p.a.
US$ 90-day investment interest rate = 6% p.a.
3-month put option on Euro strike price = $1.30
3-month Euro put option premium = 1.5%
3-month call option on Euro strike price = $1.30
3-month Euro call option premium = 2%
If OHC chooses to fully hedge the exposure in the options market, the total amount it has to pay today as option premium will be $_________. (Note: Round your answer to the nearest dollar.)
3) Use the following information to evaluate the optimal strategy of hedging the transactional exposure of OHC Corp.:
Amount to be paid = 1,000,000 Euros
Spot exchange rate = $1.31/Euro
Three-month forward rate = $1.29/Euro
OHC' s cost of capital = 12%
Euro 90-day borrowing interest rate = 10% p.a.
Euro 90-day investment interest rate = 8% p.a.
US$ 90-day borrowing interest rate = 8% p.a.
US$ 90-day investment interest rate = 6% p.a.
Premium of 3-month Euro put option (strike price: $1.30) = 2%
Premium of 3-month Euro call option (strike price: $1.30) = 1.5%
Suppose the OHC Inc. in fact hedged the transaction exposure using an option's contract. Assuming the actual spot exchange rate three months from today is $1.45, calculate the exact amount that OHC will pay in three months before the option premium: $______________. (Note: Round your answer to the nearest dollar.)
4) MMHC Inc., a U.S. corporation, has an account payable due in 90 days. Use the following information to evaluate the optimal strategy of hedging its transactional exposure:
Amount to be paid = 1,000,000 Euros
Today's spot exchange rate = $1.34/Euro
Three-month forward rate = $1.29/Euro
MMHC'c s cost of capital = 12%
Euro 90-day borrowing interest rate = 10% p.a.
Euro 90-day investment interest rate = 9% p.a.
$ 90-day borrowing interest rate = 8% p.a.
$ 90-day investment interest rate = 7% p.a.
If MMHC chooses to hedge the exposure in the money markets, how much US$ does it need to convert to Euros today? $ _______ (Note: Do not insert a $ sign, and round your answer to the nearest dollar).
5) MMHC Inc., a U.S. corporation, has an Euro-denominated account receivable in 180 days. Use the following information to evaluate the optimal strategy of hedging its transactional exposure:
Amount to be received = 1,000,000 Euros
Today's spot exchange rate = $1.31/Euro
Three-month forward rate = $1.29/Euro
MMHC cost of capital = 12%
Euro 180-day borrowing interest rate = 8% p.a.
Euro 180-day investment interest rate = 7% p.a.
$ 180-day borrowing interest rate = 6% p.a.
$ 180-day investment interest rate = 5% p.a.