Practice International Security Problem

Practice International Security Problem - the current...

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Practice International Security Problem Richard Altzer owns 40,000 shares of stock in the WV corp. The dividend payment will occur in one-month. Richard has an obligation to pay Barry Lose $53,000 today. Richard is a bit pressed for cash and offers to pay Barry by assigning him the proceeds from the dividend payments. In deciding whether to accept the offer Barry makes the following estimates and determination: The legal cost of guaranteeing the right to the dividends is $500 (which Barry would have to pay today if he accepts the deal); WV is expected to pay dividends of 1.1 euros;
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Unformatted text preview: the current one-month forward rate is $1.25/ euro; an estimate for the spot rate in one month is given to Barry as $1.26/euro; the appropriate one-month rate for various considerations are: .3% risk-free rate, .4% for the estimate of WV’s dividend, .8% for estimate of the future spot rate and .05% that the contract assigning the dividends to Barry will be broken. Should Barry accept Richard’s offer. Explain. If Barry felt he had no choice but to take the offer, should he hedge or not? Explain....
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