XYZ Corporation, located in the United States, has an accounts payable obligation of ¥658 million payable in one year to a bank in Tokyo. The current spot rate USDJPY = 105.50 and the one year forward rate is 104.25. The annual interest rate is 1.1 percent in Japan and 4.1 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0093 per yen for a premium of 0.040 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥658 million payable in one year to a bank in Tokyo. The current spot rate USDJPY = 105.50 and the one year forward rate is 104.25. The annual interest rate is 1.1 percent in Japan and 4.1 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0093 per yen for a premium of 0.040 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter21: International Cash Management

Section: Chapter Questions

Problem 3ST

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XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. $92,307. b. $ 19582168.89 c. $13054779.26 d. $ 6589854.111
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. Assuming that the forward exchange rate is the best predictor of the future spot rate, what is the expected future dollar revenue when the option hedge is used? $1,200,000. $1,150,000. $1,297,200. $1,180,000. $1,180,000. $1,082,800. $1,102,800.
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. What is the future dollar proceeds of this sale using the money market hedge? Question 1 options: $1,180,000. $1,102,800. $1,150,000. $1,118,056. $1,200,000. $1,182,857.
The current spot rate for the $ (US Dollar) to ¥ (Yen) exchange rate is 120. General Electric plans to purchase manufacturing equipment from a Japanese supplier with payment due one year from today in Yen. GE is offered a one-year currency forward contract priced at 116 ¥ (Yen) per $ (US Dollar) to hedge a $ to Yen conversion at the end of one year. GE’ is able to borrow at 1.5% for one year in $’s and invest at 1.25% in $’s and is able to borrow at 0.5% in Yen for one year and invest for one year at 0.25% in Yen. What is the fair value of the forward contract for GE? Should the company buy the forward? Why?
ATZ (US Company) expects to receive a 19 million euros in 90 days from a Australia customer. The current spot rate is S$1.836 per AUD, and the 90 day forward rate is S$1.638 per AUD. In addition, the annualized three-month AUD and USD interest rate 2.81% and 4.03%, respectively. What is the hedged value of the AUD receivable using the forward contract? How does that compare to a situation when the exchange rate remains unchanged at the spot rate?
The current spot rate is $0.80/A$ and the six-month forward rate is $0.7775/A$. One-year interest is 8% in the United States and 9% in Australia. An investor can borrow up to $ 500,000 or A$625,000, the dollar equivalent at the spot rate. a) Determine if IRP is holding between Australia (A$) and USA ($) b) If IRP does not exist, explain briefly how an investor would realize certain arbitrage profit in U.S. dollar terms. c) Explain (briefly) how IRP will be restored as a result of the arbitrage transactions investors carry out above. (Hint to answer : As more investors buy _____(A$ or $) at spot price, _____(A$ or $) will appreciate and hence, the spot price $0.80/A$ will increase so that the interest rate parity is restored.)
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current spot rate is ¥125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.0140 cents per yen. Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. Required: a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used. c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge? Answer is…
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current spot rate is ¥125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.0140 cents per yen. Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. Required: a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used. c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge? > Answer is…
A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one year forward rate is $2.02/GBP. The U.S. one year interest rate is 14% and the one year British interest rate is 12%. Determine if there is a covered interest rate arbitrage opportunity, and if so, clearly show each step involved in the arbitrage opportunity. Show the total dollar profit. If you determined that there is no arbitrage opportunity, describe why you made that decision.
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ECG has purchased an electric power generator from Mitsui Trading Company of Japan. ECG owes Mitsui ¥250 million in six months. The present spot rate is ¥250/$. The six-month forward rate is ¥248/$. ECG can borrow or invest yen at 8% and U.S. dollars at 10% (annual rates). ECG can also purchase a six-month call option on the Stock Exchange at a strike price of ¥250 for a premium of 0.004 cents per yen. Compare the alternative ways ECG can make its payment. Which way do you recommend?