Maria Gonzalez and Ganado. Ganado—the U.S.-based company discussed in this chapter—has concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of £3,000,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14% per annum (due to credit concerns of the British banks). Given the following exchange rates and interest rates, what transaction exposure hedge is now in Ganado’s best interest?

Transcribed Image Text:

Assumption 90-day A/R in pounds Value 3,000,000.00 Spot rate, US$ per $1.7620 pound ($/) 90-day forward rate, $1.7550 US$ per pound ($/) 3-month U.S. dollar 6.000% investment rate 3-month U.S. dollar 8.000% borrowing rate 3-month U.K. 8.000% investment interest rate 3-month U.K. 14.000% borrowing interest rate Ganado's WACC 12.000% Expected spot rate in $1.7850 90 days ($/) Put options on the British pound: Strike rate Premium ($/) $1.75 1.500% $1.71 1.000%