International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90-day forward rate is $.635. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability $.61 10% $.63 30% $.64 40% $.65 20% The probability that the forward hedge will result in more dollars received than not hedging is:
a. 20 percent.
b. 40 percent.
c. 60 percent.
d. 30 percent.
e. 10 percent.
Sysco corporation has purchased currency call options to hedge a 4,320,000 Swedish krona payable. The premium is $0.015 (per unit of Swedish krona) and the exercise price of the option is $0.097 per Swedish krona. If the spot rate at the time of maturity is S0.105 per Swedish krona, what is the total amount paid by the corporation if it acts rationally (after accounting for the premium paid)? Question 27 options: S 419,040. $354,240. $518,400. S453,600. $483,840.
A Japanese exporter has a €1,000,000 receivable due in one year. To hedge the position, you will buy put options on euro
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- Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm. The finance manager expects the spot price of the € to remain stable at the current rate of $1.60/€. But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low as $1.50/€. Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures. Six months Call and Put options with an exercise price of $1.60/€ are available. The Call sells for $.08/€ and the Put sells for $.04/€. A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used? assume…arrow_forwardAssume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?arrow_forwardAn FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000. Should the FI be worried about the SF appreciating or depreciating? Should it buy or sell futures to hedge against exchange rate risk exposure? How many futures contracts should it buy or sell if a regression of past spot exchange rates on changes in future exchange rates generates an estimated slope of 1.4? Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot exchange rate of SF at year-end is $0.55/SF, and the forward exchange rate is $0.5443/SF.arrow_forward
- Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. S_0 (EUR/AUD) 0.60 Se (EUR/AUD) 0.50 (0.3) and 0.65 (0.7) Premium on AUD call option R = EUR0.02 Exercise exchange rate E = 0.62 Time to expiry 3 months What is the expected value of payables in AUD under hedge Will the option to hedge be undertaken on the basis of expected spot rate? Explain.arrow_forwardAs a US exporter selling to Europe. You wish to hedge a 1,040,000 Euro to be received in 3 months with futures or forwards. Futures contract sizes for the Euro are 125,000E each. How many dollars will you receive/pay for the goods if you hedge with futures, forwards, and not hedging? Also, rank them? Now End Spot 1.100-01 $/E 1.300-01 $/E Futures 1.120 $/E 1.315 $/E Forwards 1.130-31 $/Earrow_forwardYoyo, a german company expects to pay US$10 million to a supplier in US. It is now December and the payment is due in March. The current spot rate is 1.2100. The company wants to use currency options to hedge the exposure. March currency put options are available and are for 125,000 euros, have a strike price of $1.2200 and the tick size is $0.0001. The cost of the option contract is 2.75 US cents per euro.Assuming that there is no basis,(i) Devise a hedging strategy for Yoyo using currency options.(ii) Advise on the action to be taken by Yoyo and the outcome in case the spot rate in March when the dollars must be paid is:(a) $1.2500 = €1 (b) $1.1800 = €1arrow_forward
- Q1-13 If a speculator observes that the current 3-month forward rate on Swiss francs is 20¢ = 1 franc, but he/she expects that the spot rate in 3 months will be 30¢ = 1 franc, then this speculator would now a. buy dollars on the forward market. b. buy francs on the forward market. c. sell francs on the forward market. d. buy francs on the spot market and simultaneously sell francs on the 3-month forward market if the current spot rate is 25¢ = 1 franc.arrow_forwardLambert Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 66,600 Swiss francs, or $40,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.822 francs. If the spot rate in 90 days later is actually 1.629 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?(Please show work)arrow_forwardMender Co. will be receiving 700,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.74and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.72 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assume that the spot rate in 180 days is $.73. (1) Should the company use call options or put options? Why? (2) Calculate the amount received from the currency option hedge (after considering the premium paid). (3) Would the company have received more without hedging?arrow_forward
- Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum price that a six-month American call option with a striking price of $0.6800 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.5 percent. (Do not round intermediate calculations.)arrow_forwardSuppose you have a 1,200,000 US dollar payable coming due in June and that the spottoday is .98 US/CDN. You get a strike of .98 US and you are dealing with the PHLX. Suppose you are deciding whether or not to hedge out the foreign exchange risk. The size of the Canadian dollar contract on the PHLX is 50,000 Canadian dollars percontract. The option price is listed as 1.00 for the June put on Canadian dollars and .90 on the June call. Suppose you expect the US/CDN to be .97 on the last day of the option (the expiry date). This also happens to be the day you need to cover your payable. How much does it cost you to set up the hedge with brokerage cost set to zero? (In CANADIAN dollars approximately.) A. 12,755 B. 12,887 C. 12,000 D. 12,500arrow_forwardAn investor enters a short forward contract to sell 100 euros for dollars at exchange rate 1.3 dollars per euro. If the exchange rate at the end of contract is 1.29 dollars per euro, the dollar payoff is (a) −130 (b) − 1 (c) 0 (d) 1 (e) 130 And, The standard deviation of quarterly changes in oil price is 0.65, the standard deviation of quarterly changes in oil futures price is 0.81, and the correlation between the two changes is 0.8. The optimal hedge ratio for a 3-month futures contract is (a) 0.13 (b) 0.64 (c) 0.8 (d) 0.99 (e) 1.25arrow_forward
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