Business, 24.10.2021 14:00 ckolliegbo

You are a U. S.-based importer of bicycles and just bought competition-style bicycles for €100,000 from Italy. You owe €100,000 to the Italian supplier in one year. You are concerned about the number of dollars you will have to pay for this purchase in one year. Suppose:
- The spot exchange rate is $1.50/€
- The forward exchange rate is $1.25/€
- U. S. interest rate is 3.00% per annum
- The interest rate in Europe is 4.00% per annum
- Call option with a strike price of $1.30/€ is available with premium of $0.10/€
- Put option with a strike price of $1.30/€ is available with premium of $0.20/€
Round your answers to two decimal places.
a. Unhedged position: Suppose you decide not to do anything. In one year, spot rate happens to be $1.50/€. What will be the total dollar cost of this purchase then? What will be the total dollar cost if spot rate happens to be $1.30/€ in one year? Or $1.40/€? Are you subject to exchange rate risk in this case?
b. Forward market hedge: How can you lock in the exact dollar cost of this purchase by using forward contracts? Should you agree to buy or sell €100,000 forward in one year’s time? What will be the total dollar cost of this purchase with forward hedge? Are you subject to exchange rate risk in this case?
c. Money market hedge: How can you hedge using money market hedge? Where should you borrow and how much? What is the total dollar cost of this purchase? Are you
subject to exchange rate risk in this case?
d. Option market hedge: How can you hedge using options? Should you purchase put or call options on euros? What is the total premium today? When will you exercise your options and what will be the total dollar cost if you exercise? And when will you not exercise your options and what will be the total dollar cost then?
e. Comparing hedging methods: What are the break-even exchange rates between hedging methods? When do you prefer which hedging method?

Answers: 2

Show answers

Another question on Business

Business, 22.06.2019 02:50

Wren pork company uses the value basis of allocating joint costs in its production of pork products. relevant information for the current period follows: product pounds price/lb. loin chops 3,000 $ 5.00 ground 10,000 2.00 ribs 4,000 4.75 bacon 6,000 3.50 the total joint cost for the current period was $43,000. how much of this cost should wren pork allocate to loin chops?

Answers: 1

Answer

Business, 22.06.2019 05:30

Eliza works for a consumer agency educating young people about advertisements. instead of teaching students to carefully read advertisement claims, she encourages them to develop a strong sense of self and to keep their life goals and dreams separate from commercial products. why might eliza's advice make sense?

Answers: 2

Answer

Business, 22.06.2019 11:20

In 2000, campbell soup company launched an ad campaign that showed prepubescent boys offering soup to prepubescent girls. the girls declined because they were concerned about their calorie intake. the boys explained that “lots of campbell’s soups are low in calories,” which made them ok for the girls to eat. the ads were pulled after parents expressed concern. why were parents worried? i

Answers: 2

Answer

Business, 22.06.2019 12:40

When cell phones were first entering the market, they were relatively large and reception was undependable. all cell phones were essentially the same. but as the technology developed, many competitors entered, introducing features unique to their phones. today, cell phones are only a small fraction of the size and weight of their predecessors. consumers can buy cell phones with color screens, cameras, internet access, daily planners, or voice activation (and any combination of these features). the history of the cell phone demonstrates what marketing trend?

Answers: 3

Answer

You know the right answer?

You are a U. S.-based importer of bicycles and just bought competition-style bicycles for €100,000 f...

Questions