A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. 1) Calculate hedging alternatives ( Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. 2) Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other? Dividend Declared due in Six Months in Sri Lanka Rupee (LKR) LKR 4,350,000 Spot Rate (LKR/US$) 196 Six Forward Rate (LKR/US$) 198 Six Month Option on : Call Option Put Option Strike Rate (LKR/$) 204 204 Premium, Percent Per Year 3.5 % 5.5 % U.S. Exporter’s Weighted Average Cost of Capital (WACC) 9%

A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. 1) Calculate hedging alternatives ( Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. 2) Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other? Dividend Declared due in Six Months in Sri Lanka Rupee (LKR) LKR 4,350,000 Spot Rate (LKR/US$) 196 Six Forward Rate (LKR/US$) 198 Six Month Option on : Call Option Put Option Strike Rate (LKR/$) 204 204 Premium, Percent Per Year 3.5 % 5.5 % U.S. Exporter’s Weighted Average Cost of Capital (WACC) 9%

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 27QA

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A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed.a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor.b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?
Investors from Japan, Philippines, and China frequently invest in each other based on prevailing interest rates. If China’s interest rates increase, Japanese investors are likely to buy ____ peso denominated securities, and the Chinese yuan is likely to ____ relative to the peso. A. more; depreciate B. more; appreciate C. fewer; depreciate D. fewer; appreciate
A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one year forward rate is $2.02/GBP. The U.S. one year interest rate is 14% and the one year British interest rate is 12%. Determine if there is a covered interest rate arbitrage opportunity, and if so, clearly show each step involved in the arbitrage opportunity. Show the total dollar profit. If you determined that there is no arbitrage opportunity, describe why you made that decision.
Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in six months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a decline in the value of the Swiss franc over the next six months. The U.S. risk-free rate is 2.6 percent, and the Swiss risk-free rate is 1.0 percent. Assume that interest rates are expected to remain fixed over the near future. The current USD/CHF rate is 1.1058. Calculate the price at which the U.S. Company could enter into a forward USD/CHF contract that expires in 180 days (X.XXXX)
Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a decline in the value of the Swiss franc over the next three months. The U.S. risk-free rate is 2.9 percent, and the Swiss risk-free rate is 0.9 percent. Assume that interest rates are expected to remain fixed over the near future. The current USD/CHF rate is 1.1059. Calculate the price at which the U.S. Company could enter into a forward USD/CHF contract that expires in 90 days (X.XXXX
Assuming that existing U.S. one year interest rate is 8% and the Canadian one-year interest rate is 9%. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt covered interest arbitrage, what will be their return? If Canadian investors attempt covered interest arbitrage what will be their return?
In the spot market, 1 Philippine peso can be exchanged for 2.51 Japanese yen. In the 1-year forward market, 1 Philippine peso can be exchanged for 2.53 Japanese yen. The 1-year, risk-free rate of interest is 5 percent in the Philippines. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities?
The prevailing one-year risk-free interest rate in Argentina is higher than in the U.S. and will continue to be higher over time. Sycamore Co. believes the international Fisher effect (IFE) can be used to derive the best forecast of the peso's exchange rate movement over time. In contrast, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? Briefly explain.
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ , which represents a profit of $ over the initial $200,000 that California Co. used from their own funds.
Assume the following information: Spot rate of Mexican peso $0.100 1-year forward rate of Mexican peso $0.099 1-year Mexican interest rate 6% 1-year U.S. interest rate 5% 1. Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) 2. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?

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Dividend Declared due in Six Months in Sri Lanka Rupee (LKR)	LKR 4,350,000
Spot Rate (LKR/US$)	196
Six Forward Rate (LKR/US$)	198

Six Month Option on :	Call Option	Put Option
Strike Rate (LKR/$)	204	204
Premium, Percent Per Year	3.5 %	5.5 %
U.S. Exporter’s Weighted Average Cost of Capital (WACC)	9%