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

Other questions on the subject: Business

Business, 21.06.2019 15:10, exoticbunnylover123

Why there has to be two lines in a plane

Answers: 1

continue

Business, 22.06.2019 00:00, kluckey3426

Which statement is true of both presidential and parliamentary systems of government? a. the executive branch operates independently from the legislative branch. b. the members of the legislative branch are directly elected by the people. c. the head of government is chosen by members of his or her political party. d. the head of government is directly elected by the people

Answers: 1

continue

Business, 22.06.2019 14:30, violetvinny

crow design, inc. is a web site design and consulting firm. the firm uses a job order costing system in which each client is a different job. crow design assigns direct labor, licensing costs, and travel costs directly to each job. it allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs. direct labor hours (professional) 6,250 hours direct labor costs ($1,800,000 support staff salaries ,000 computer ,000 office ,000 office ,000 in november 2012, crow design served several clients. records for two clients appear here: delicious treats mesilla chocolates direct labor 700 hours 100 hours software licensing $ 4,000 $400 travel costs 8,000 1. compute crow design’s direct labor rate and its predetermined indirect cost allocation rate for 2012. 2. compute the total cost of each job. 3. if simone wants to earn profits equal to 50% of service revenue, how much (what fee) should she charge each of these two clients? 4. why does crow design assign costs to jobs?

Answers: 2

continue

Business, 22.06.2019 16:00, angelinaranee15

In a perfectly competitive market, the long-run market supply curve tends to be horizontal or nearly so. what is another way to state this fact? (a) market supply is much more elastic in the long run than the short run. (b) in the long run, average total cost is minimized. (c) in the long run, price equals marginal cost. (d) market supply is much less elastic in the long run than the short run.

Answers: 1

continue

Do you know the correct answer?

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