536Q2[1] - Version A FIN 536 11S Fin 536 International...

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Version A FIN 536, 11S Page 1 of 1 Fin 536 – International Finance Quiz 2 NAME:______________________ Due Date: April 5, 2011 Answer All Questions. Read all the answers carefully and select the best answer for each question. Answer the next FIVE questions based on the following information. Your firm imports machines from UK. The price is £ 1 million with payment due in 6 months. The following information is available: FX market S=1.9 $/£, F 6 =1.8 $/£ from Bank XX, F 6 =1.81 $/£ from Bank YY Money market 6-month Borrowing: r £ = 4.0%, r $ = 2.8% 6-month Deposit: r £ = 3.0%, r $ = 2.0% WACC 8% You consider several alternatives to hedge this future Cashflow (HINT: Find the $ cost profile for each strategy first): Strategy A: Remain unhedged . Strategy B: Forward hedge . Strategy C: Money market hedge . 1. Based on Strategy A: what is the $ cost of the unhedged AP if the exchange rate is 1.2 $/£ in 6 months?
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