1.XYZ Company has just signed a contract to purchase light rail cars from a manufacturer in Germany for 1,500,000 . The purchase is made in June today with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in rather than $,XYZ is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. - The current spot exchange rate is $1.150/. - The three month forward rate is $1.12/. - The six month forward rate is $1.13/. - XYZ's cost of capital is 13%. - The Euro zone borrowing rate is 12% annually. - The Euro zone lending rate is 8% annually. - The U.S. 6-month borrowing rate is 8% annually. - The U.S. 6-month lending rate is 6% annually. - The strike price for December call options for 1,500,000 is $1.18/ and the option premium is 1.5% of the total cost of the option based on the current spot exchange rate, while the strike price for December put options for 1,500,000 is $1.18/ and the option premium is 2.5%. - XYZ's FX advisor's forecast for 6-month spot rates is $1.17/. Based on the information provided above: a) Calculate the cost of each hedging alternative available to XYZ. b) Based on your findings in part (a), which hedging alternative(s) would you recommend to XYZ? Which factors should XYZ consider in making its final decision on choosing the best hedging alternative? c) For option market hedge, if the future spot rate is above and below than $1.18/owmhat what kind of action does the company has to take? 1.XYZ Company has just signed a contract to purchase light rail cars from a manufacturer in Germany for 1,500,000 . The purchase is made in June today with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in rather than $,XYZ is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. - The current spot exchange rate is $1.150/. - The three month forward rate is $1.12/. - The six month forward rate is $1.13/. - XYZ's cost of capital is 13%. - The Euro zone borrowing rate is 12% annually. - The Euro zone lending rate is 8% annually. - The U.S. 6-month borrowing rate is 8% annually. - The U.S. 6-month lending rate is 6% annually. - The strike price for December call options for 1,500,000 is $1.18/ and the option premium is 1.5% of the total cost of the option based on the current spot exchange rate, while the strike price for December put options for 1,500,000 is $1.18/ and the option premium is 2.5%. - XYZ's FX advisor's forecast for 6-month spot rates is $1.17/. Based on the information provided above: a) Calculate the cost of each hedging alternative available to XYZ. b) Based on your findings in part (a), which hedging alternative(s) would you recommend to XYZ? Which factors should XYZ consider in making its final decision on choosing the best hedging alternative? c) For option market hedge, if the future spot rate is above and below than $1.18/owmhat what kind of action does the company has to take
