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F84f85 the put option does not guarantee the company

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=F84+F85The put option does not GUARANTEE the company of settling for the booked amount.The money market and forward hedges do; the money market yielding the higher proceeds.b) Breakeven rate between the money market and the forward hedge is determined b6Money market, US$ up-front$168,245.38=F74Forward contract, US$, end of 90 days$171,173.57=F67(1 + x)101.740%$168,245.38 (1+x) = $171,188.91=F93/F92x1.74043%For 90 days=F94-1Breakeven rate, % per annum$0.06962=F95*4Krystal is a U.S.-based company which manufactures, sells, and installs water purification equipment. On April 11th the company sold a system to the City of Nagasaki,Japan, for installation in Nagasaki’s famous Glover Gardens (where Puccini’s Madame Butterfly waited for the return of Lt. Pinkerton.) The sale was priced in yen at¥20,000,000, with payment due in three months.Note:The interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes.The spot ¥118.255/$, for example, is amid-point range.On April 11, the spot yen traded in London from ¥118.30/$ to ¥117.550/$.Additional information: Aquatech’s Japanese competitors are currently borrowing yen fromJapanese banks at a spread of 2 percent above the Japanesemoney rate. Aquatech's weighted average cost of capital is 16%, and the company wishes to protect the dollar value of this receivable.* Call option on ¥20,000,000 at exercise price of ¥118.00/$:a 1% premium.* Put option on ¥20,000,000, at exercise price of ¥118.00/$:a 3% premium.Amount of receivable, Japanese yen (¥)Spot exchange rate at time of sale (¥/$)Competitor borrowing premium, yen (¥)One-month forward rate (¥/$)Three-month forward rate (¥/$)One-year forward rate (¥/$)
Problem 10.7Krystal(note - WACC structure of this exercise is only appropriate under restrictive conditions.Spot exchange rate:¥118.255¥118.255/$ (closing mid-rates)One-month forward rate:¥117.7605.04%Three-month forward:¥116.8304.88%One-year forward:¥112.4505.16%Money RatesUnited StatesJapanDifferentialOne month4.8750%0.09375%4.78125%Three months4.9375%0.09375%4.84375%Twelve months5.1875%0.31250%4.87500%Three-month options from Kyushu Bank:a)What are the costs and benefits of alternative hedges? Which would you recommend, and why?b)What is the breakeven reinvestment rate when comparing forward and money market alternatives?AssumptionsValues20,000,000118.255Booked value of sale (amount/spot rate)$169,126.04Days receivable due90Krystal's WACC16.0%2.0%Forward rates and premiumsForward RatePremium117.7605.04%116.8304.88%112.4505.16%Investment rates, % per annumUnited StatesJapan1 month4.8750%0.09375%3 months4.9375%0.09375%12 months5.1875%0.31250%Purchased optionsStrike (yen/$)Premium3-month call option on yen118.0001.0%3-month put option on yen118.0003.0%a.Alternative HedgesValuesCertainty1.Remain uncovered.Account receivable (yen)20,000,000Possible spot rate in 90 days (yen/[email protected] time of sale)118.255Cash settlement in 90 days (US$)$169,126.04Uncertain.=F60/F612.Forward market hedge.Account receivable (yen)20,000,000Forward rate (yen/$)116.830Cash settlement in 90 days (US$)$171,188.91Certain.=F65/F663.Money market hedge.

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Term
Fall
Professor
Sweeney
Tags
Test, United States dollar, Forward contract, Money Market Hedge

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