Sarasota Industrial Inc. of Florida purchased computer equipment from Sydney Tech. of Australia for A$ 5 ,

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Sarasota Industrial Inc. of Florida purchased computer equipment from Sydney Tech. of

Australia for A$ $5, 000, 000$ with payment due in $3$ months. The forecasting department of the

firm expects the spot rate in three months to be $ $. 6615 /$ A$ The following quotes are available:

Three month investment interest rate on US$ $2.80 %$ per annum

Loan rate on US$ $5.96 %$ per annum

Three month investment interest rate on A$ $4.20 %$ per annum

Loan rate on A$ $6.80 %$ per annum

Spot exchange rate Bid $ $. 6650 /$ A$ Ask $ $. 6658 /$ A$

Three month forward rate Bid $ $. 6605 /$ A$ Ask $ $. 6620 /$ A$

Three month call option on A$ $5, 000, 000$ at

an exercise price of $ $0.6700 /$ A$ and a $1.5 %$ of spot ask premium.

GIVE $’$ s cost of capital is $12 %$ and it wishes to minimize the dollar cost of this

payable. The CFO has informed your department that the company is currently in a low

cash position and if a money market hedge is used, a U $.$ S $.$ dollar loan would be necessary.

$.$ However, the option premium should be carried forward at the cost of capital.

$1 .$ What is the cost using the money market hedge?

$2 .$ What is the cost using the forward market hedge?

$3 .$ What is the maximum cost of the option hedge? $($ Remember include the FV

premium and exercise value $) .$

$4 .$ At what ending spot rate would the forward market hedge equal the call option

hedge?

$5 .$ Based on the forecast, which technique of the $3$ above has the cheapest cost?

$6 .$ If the future spot rate fell to $ $0.63 /$ A$ $,$ which technique is the cheapest?

Posted Date: May 11, 2024 04:15 AM

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