Ch08_SSol - Problem 8.3 Warner Indonesia Warner, the...

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Problem 8.3 Warner Indonesia Assumptions Values At Spot Receivable due in 3 months, in Indonesian rupiah (Rp) Rp1,650,000,000 $174,603.17 Spot rate (Rp/$) 9,450 Expected spot rate in 90 days (Rp/$) 9,400 3-month forward rate (Rp/$) 9,950 Minimum dollar amount acceptable at settlement $168,000.00 Risk Alternatives Values Assessment 1. Remain Uncovered. Settle A/R in 90 days at current spot rate. If spot rate in 90 days is same as current $174,603.17 Risky (Rp750,000,000 / Rp8,800/$) If spot rate in 90 days is Rp9,400/$ $175,531.91 Risky (Rp750,000,000 / Rp9,400/$) If spot rate in 90 days is Rp9,800/$ $165,829.15 Risky (Rp750,000,000 / Rp9,800/$) 2. Sell Indonesian rupiah forward. A/R sold forward 90 days $165,829.15 Certain "Cost of cover" is the forward discount on Rp -20.1% Analysis The Indonesian rupiah has been highly volatile in recent years. This means that during the 90-day period, any variety of economic or political or social events could lead to an upward bounce in the exchange rate, reducing the dollar proceeds at settlement to an unacceptable level. Unfortunately, the forward contract does not result in dollar proceeds which meet the minimum margin. The cost of forward cover, 20.1%, is indicative of the "artificial interest rates" used by some financial
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Ch08_SSol - Problem 8.3 Warner Indonesia Warner, the...

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