8. Hewlett-Packard’s Indian financing-cum-hedging conundrum (intermediate).

Following the successful introduction of Copernicus, its latest line of laptop computers, in May 2014, Hewlett-Packard-India (HPI) was facing working capital financing problems: It needed rupee (INR) 5 billion over the next six months, which could be readily sourced from the Indian money market at the annual rate of 10 percent (interest rate payable semiannually) or from the Eurodollar market through a one-year zero-coupon note issued at 95 percent.

a. Find the break-even exchange rate(s) that would leave HPI indifferent between rupee and dollar financing. The current spot rupee price of one US$ is INR 50 = US$1. Illustrate your answer graphically.

b. Forward rupee contracts are available at a 4.5 percent annual discount from the dollar standpoint; should HPI consider covered dollar financing?

c. Illustrate your decision graphically. Are the rupee and dollar money markets integrated?

d. Prior to initiating new financing, the comptroller of HP-USA projected a net asset translation exposure of INR 9 billion. Explain how the two financing alternatives introduced in Problem 8a would impact HP’s rupee translation exposure.

e. HPI was also considering the nonrecourse discounting of six-month US$-

denominated accounts receivable (A/R) in the amount of US$50,000,000.

How much financing would be generated? What would its impact be on HP’s rupee translation exposure?

f. How could HP hedge its rupee translation exposure? Which method do you recommend?