Chapter 11 Payable ICE students

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School
John Brown Univeristy **We aren't endorsed by this school
Course
FIN FINANCIAL
Subject
Finance
Date
Nov 7, 2023
Pages
5
Uploaded by DeanExploration7479 on coursehero.com
Part 1- Payable Hedge Number of Units Given Information 1 100,000.00 Forward $ 120,000 Money Market Hedge Current exchange rate Borrowing Rate 8.00% Period equivalent 8.00% Investing Rate 5.00% Period equivalent 5.00% Deposit amount to hedge payable 95,238.10 Dollar Equivalent at Current Exchange Rate $ 110,476 Dollar Amount of Loan Repayment $ 119,314 Equivalent Strike Price Forward Rate 120,000 Strike Price- Call Call Premium 3,000 Equivalent Spot rate at Call expiration 117,000 Probability- Projections Value Option Price Forecasted Future Exchange Rates $ 119,000 $ 23,800 $ 1.20 $ 123,000 $ 86,100 $ 123,000 $ 12,300 $ 122,200 Expected value with No Hedge $ 116,000 $ 23,200 $ 122,000 $ 85,400 $ 124,000 $ 12,400 $ 121,000 Purchase Price Per Unit Use Exchange Rate if Less than Option Strike Price
Prob. 100,000.00 1 $ 1.20 $ 1.16 $ 1.20 $ 1.20 $ 0.03 $ 1.17 Premium Total Cost Prob. $ 0.03 $ 1.19 $ 1.16 20% $ 1.23 $ 1.22 70% $ 1.23 $ 1.24 10% $ 1.160 20% $ 1.220 70% $ 1.240 10% Total Purchase Price Period/ Annual Relevant Exchange Rate Forecast Values Process for Money Market Hedge: Variables: Amount of payable denominated in foreign cur Current spot rate for foreign currency Interest rate MNC can earn in foreign bank (dep Interest rate MNC must pay to domestic (home Process: Determine the amount MNC will need to place satisfy the payable when goods are delivered. Take payable amount in foreign currency and di total amount in foreign currency MNC will need amount of payable. Determine home currency amount that must b deposit in the foreign bank. Take amount in bu determines how much is borrowed from home When the goods are delivered the MNC will wit bank denominated in foreign currency plus the the purchase. Take amount borrowed from home bank and m This equals the total cost of the payable as it wi transaction. The only cash outflow from the M The transaction exposure of a payable can be h Forward of Future Money market hedge Call option hedge Example: Coleman needs 100,000 Euros in one year to sa is $1.16 Three alternative hedging strategies: Coleman could enter into a forward hedge at $1 Coleman could conduct a money market hedge the interest rate in the U.S. is 8%. Coleman could purchase a call option with a str $.03 per Euro. Coleman forecast the value of th probabilities: $1.16/Euro - 20% $1.22/Euro - 70% $1.24/Euro - 10% Should Coleman hedge the payable and if so wh Determine what the equivalent spot rate would outcome of the call option to equal that of the
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