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 23:20

Over the past several years, joyce chen has been able to save regularly. as a result, today she has $54,188 in savings and investments. she wants to establish her own business in 5 years and feels she will need $100,000 to do so. a. if she can earn 6% on her money, how much will her $54,188 in savings/investments be worth in 5 years? will joyce have the $100,000 she needs? if not, how much more money will she need? b. given your answer to part a, how much will joyce have to save each year over the next 5 years to accumulate the additional money? assume she can earn interest at a rate of 6%. c. if joyce can afford to save only $4,000 a year then, given your answer to part a, will she have the $100,000 she needs to start her own business in 5 years?

Answers: 3

Answer

Business, 23.06.2019 01:40

The new york times (nov. 30, 1993) reported that “the inability of opec to agree last week to cut production has sent the oil market into turmoil . . [leading to] the lowest price for domestic crude oil since june 1990.” why were the members of opec trying to agree to cut production? so they could save more oil for future consumption so they could lower the price so they could raise the price why do you suppose opec was unable to agree on cutting production? because each country has a different production capacity because each country experiences different production costs because each country has an incentive to cheat on any agreement the newspaper also noted opec’s view “that producing nations outside the organization, like norway and britain, should do their share and cut production.” what does the phrase “do their share” suggest about opec’s desired relationship with norway and britain? opec would like norway and britain to keep their production levels high. opec would like norway and britain to act competitively. opec would like norway and britain to join the cartel.

Answers: 2

Answer

Business, 23.06.2019 02:50

Expert computers was started in 2018. the company experienced the following accounting events during its first year of operation: started business when it acquired $40,000 cash from the issue of common stock. purchased merchandise with a list price of $32,000 on account, terms 2/10, n/30. paid off one-half of the accounts payable balance within the discount period. sold merchandise on account for $28,000. credit terms were 1/20, n/30. the merchandise had cost expert computers $16,000. collected cash from the account receivable within the discount period. paid $2,100 cash for operating expenses. paid the balance due on accounts payable. the payment was not made within the discount period. required record the events in a horizontal statements model below. in the cash flows column, use the letters oa to designate operating activity, ia for investing activity, fa for financing activity, or nc for net change in cash. if the account is not affected by the event, leave the cell blank. the first event is recorded as an example. what is the amount of gross margin for the period? what is the net income for the period?

Answers: 1

Answer

Business, 23.06.2019 15:20

when taxes are levied on transactions, irrespective of the party they are levied on, a. the government can absorb some of the surplus, but also creates a social loss since some of the wealth creating transactions are discouraged b. the government can absorb all the producer surplus from the transactions as revenue c. the government can absorb all of the surplus (producer and consumer) d. the government can absorb all the consumer surplus from the transactions as revenue

Answers: 2

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