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? Dividend Declared due in Six Months in Sri Lanka Rupee (LKR) Spot Rate (LKR/USS) Six Forward Rate (LKR/US$) Six Month Option on : Strike Rate (LKR/S) Premium, Percent Per Year U.S. Exporter's Weighted Average Cost of Capital (WACC) LKR 4,350,000 196 198 Call Option 204 3.5 % 9% Put Option 204 5.5%
A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other? Dividend Declared due in Six Months in Sri Lanka Rupee (LKR) Spot Rate (LKR/USS) Six Forward Rate (LKR/US$) Six Month Option on : Strike Rate (LKR/S) Premium, Percent Per Year U.S. Exporter's Weighted Average Cost of Capital (WACC) LKR 4,350,000 196 198 Call Option 204 3.5 % 9% Put Option 204 5.5%
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 11QA
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Transcribed Image Text: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?
Dividend Declared due in Six Months in Sri Lanka Rupee (LKR)
Spot Rate (LKR/USS)
Six Forward Rate (LKR/US$)
Six Month Option on :
Strike Rate (LKR/S)
Premium, Percent Per Year
U.S. Exporter's Weighted Average Cost of Capital (WACC)
LKR 4,350,000
196
198
Call Option
204
3.5%
9%
Put Option
204
5.5%
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