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2. (25 points) A manufacturing firm in San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q63,000,000
2. (25 points) A manufacturing firm in San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q63,000,000 is due in six months. ("Q" is the symbol for Guatemalan quetzals). The company uses 12% per year as its weighted average cost of capital. Quotes for foreign exchange and for interest rates (in annual terms) available to the company are as follows: Construction payment due in six months Bid and ask quotes for the spot rate (quetzals per one dollar) Bid and ask quotes for the 6-month forward rate (quetzals per one dollar) 6-month Guatemalan interest rate (per year) 6-month dollar interest rate (per year) The company's estimated (per year) cost of capital (WACC) 63,000,000 8.320 and 8.380 8.650 and 8.750 10.0% 2.0% 12.0% The company's treasury manager, concerned about the Guatemalan economy, contemplates if and how the company should be hedging its foreign exchange risk. What realistic alternatives are available to the company for making payments? Which method would you select and why? Explain each alternative (including a forward hedge and a money market hedge) and precisely describe the transactions it entails. 2. (25 points) A manufacturing firm in San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q63,000,000 is due in six months. ("Q" is the symbol for Guatemalan quetzals). The company uses 12% per year as its weighted average cost of capital. Quotes for foreign exchange and for interest rates (in annual terms) available to the company are as follows: Construction payment due in six months Bid and ask quotes for the spot rate (quetzals per one dollar) Bid and ask quotes for the 6-month forward rate (quetzals per one dollar) 6-month Guatemalan interest rate (per year) 6-month dollar interest rate (per year) The company's estimated (per year) cost of capital (WACC) 63,000,000 8.320 and 8.380 8.650 and 8.750 10.0% 2.0% 12.0% The company's treasury manager, concerned about the Guatemalan economy, contemplates if and how the company should be hedging its foreign exchange risk. What realistic alternatives are available to the company for making payments? Which method would you select and why? Explain each alternative (including a forward hedge and a money market hedge) and precisely describe the transactions it entails
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