Agyenim Boateng, owner of the Best Pineapple Company Ltd will be receiving 20,000 British pounds about one month from now as payment for pineapple juice produced and exported by his company. Agyenim is concerned about his exposure because he believes that there are two possible scenarios: (1) the pound will depreciate by 3 percent over the next month or (2) the pound will appreciate by 2 percent over the next month. There is a 70 percent chance that Scenario 1 will occur. There is a 30 percent chance that Scenario 2 will occur. Agyenim notices that the prevailing spot rate of the pound is GHS 8.1 and the onemonth forward rate is GHS 8.6. Agyenim can purchase a put option over the counter from a securities firm that has an exercise (strike) price of GHS 8.6, a premium of GHS0.025, and an expiration date of one month from now. Determine the amount of cedis received by the Best Pineapple Company under each of the two exchange rate scenarios if: a) The receivables to be received in one month are not hedged. b) A put option is used to hedge the receivables in one month. c) A forward hedge is used to hedge the receivables in one month. Summarize the results of Ghana cedis received based on an unhedged strategy, a put option strategy, and a forward hedge strategy. Select the strategy that you prefer based on the information provided.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

Problem 9MC: Now assume that it is several years later. The brothers are concerned about the firm’s current...

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Agyenim Boateng, owner of the Best Pineapple Company Ltd will be receiving 20,000 British pounds about one month from now as payment for pineapple juice produced and exported by his company. Agyenim is concerned about his exposure because he believes that there are two possible scenarios: (1) the pound will depreciate by 3 percent over the next month or (2) the pound will appreciate by 2 percent over the next month. There is a 70 percent chance that Scenario 1 will occur. There is a 30 percent chance that Scenario 2 will occur.

Agyenim notices that the prevailing spot rate of the pound is GHS 8.1 and the onemonth forward rate is GHS 8.6. Agyenim can purchase a put option over the counter from a securities firm that has an exercise (strike) price of GHS 8.6, a premium of GHS0.025, and an expiration date of one month from now. Determine the amount of cedis received by the Best Pineapple Company under each of the two exchange rate scenarios if:

a) The receivables to be received in one month are not hedged.
b) A put option is used to hedge the receivables in one month.
c) A forward hedge is used to hedge the receivables in one month.

Summarize the results of Ghana cedis received based on an unhedged strategy, a put option strategy, and a forward hedge strategy. Select the strategy that you prefer based on the information provided.

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