Dozier a

2119 WordsApr 2, 20139 Pages
1. Evaluate each of the different alternatives.Justify your assumptions and argue which is the best one for Dozier. After their bid was accepted, Dozier has three options to choose from. Of the three choices, the 1st alternative yields the most profit. However, the profit from alternative 1 cannot be guaranteed, and it is much more volatile. The company wants to expand its market to the U.K. and also guarantee the profit (while minimizing exchange risk). Therefore, alternative 2, which has a higher profit margin than alternative 3 is the best hedging choice for Dozier. Alternative 1 Alternative 2 Alternative 3 Dollar value of the balance $1,505,086.88 $ 1,501,438.5 $1,493,995.00 Dollar value of the contract…show more content…
The cost of hedge is (1501438.5 - 1519627.5 )/1519627.5 = -1.2% Alternative 3: If Dozier secures a 90-day pound loan Dozier can also do a spot hedge, which worked similarly in that it also created a pound obligation 90 days. Dozier would borrow pounds from bank and exchange the proceeds into dollars at the spot rate of 1.4198. Dozier would use its pound receipts, £1.0575 million, to repay the loan. The rate of loan would be at 1.5% above the U.K. prime rate. Since the loan rate for three months is (1.5% + 13.5%)/4=3.75%, Dozier could receive £1.0575 million/ (1+3.75%) = £1019277 on 1/14/86. Then he would exchange them to dollars. With the spot transaction at 1/14/86, Dozier would get £1019277 × 1.437 =$ 1464701.2 on 1/14/86. To get more profit, Dozier would deposit dollars. At end of three months, they would receive $ 1464701.2 × (1+8%/4) = $1493995 for £1.0575 million. As we discuss above, the company can get 168847.5 × 1.02 = $172224.5 dollars from the 10% deposit. Thus, the actual revenue of the contract is 1493995 + 172224.5 =$1666219.73. The total cost is $1642783. Ergo the profit is 1666219.73 - 1642783 =$ 23437. The percent of profit is 23437/1642783 = 1.43%. The cost of hedge is (1493995 - 1519627.5 )/1519627.5 = -1.7% 2. What is the relation between the forward rate,the spot rate and the interest rates in the US and the UK? Below

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