fin536_ex_7[1]

fin536_ex_7[1] - 117.760 5.04% Three-month forward rate (...

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Fin536 Exercise 7 Chapter 11 Transaction Exposure 1. Aqua-Pure is a U.S.-based company which manufactures, sells, and installs water purification equipment. On April 20th the company sold a system to the City of Nagasaki, Japan, for installation in Nagasaki’s famous Glover Gardens (where Puccini’s Madame Butterfly waited for the return of Lt. Pinkerton.) The sale was priced in yen at ¥20,000,000, with payment due in three months. Aqua- Pure’s Japanese competitors are currently borrowing yen from Japanese banks at a spread of 2 percentage points above the Japanese money rate. Aqua-Pure's weighted average cost of capital is 16%, and the company wishes to protect the dollar value of this receivable. Forward rates and premiums Forward Rate Premium Spot exchange rate at time of sale ( ¥ /$) 118.255 One-month forward rate ( ¥ /$)
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Unformatted text preview: 117.760 5.04% Three-month forward rate ( /$) 116.830 4.88% One-year forward rate ( /$) 112.450 5.16% Money rates, % per annum United States Japan 1 month 4.8750% 0.09375% 3 months 4.9375% 0.09375% 12 months 5.1875% 0.31250% options Strike (yen/$) Premium 3-month call option on yen 118.000 1.8% 3-month put option on yen 118.000 3.0% 3-month put option on yen 115.000 2.0% a) What are the costs and benefits of alternative hedges: remain unhedged, money market hedge, forward hedge, put option hedge. b) What is the breakeven reinvestment rate when comparing forward and money market alternatives? c) What is the break-even spot rate when comparing the put option and forward alternatives? d) How to construct a short position in a synthetic forward with a forward price of F 3 (/$)=118, ( selling at forward at 118/$)?...
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