3. AMERI-Corp. will receive 5,000,000 Pounds (P) in 270 days ( =.75 yr) from a European customer. AMERI-Corp is concerned about exchange rate risk on the future US$ value of this receivable and wants to compare a Money Market or Option hedge. Spot rate today is $1.30/P ANNUAL deposit (investing) rate is: Europe = 4.0% USA = 2.4% ANNUAL borrowing rate is: Europe = 5.0%: USA = 3.69 A CALL option is available with 270 days to maturity with a strike price of $1.31/ P with a premium of $.015/P A PUT option is available with 270 days to maturity with a strike price of $1.305 / P with a premium of $.022/P AMERI-Corp forecasted the +270-day future expected Spot Rate as follows: $1.285/P 15% prob. $1.295 / P 30% prob. $1.310 /P 40% prob. $1.325 / P 15% prob. QUES. 3-A-B-C Estimate the amounts that AMERI-Corp can expect by hedging among: $ 3-A 10pts MONEY MARKET hedge equivalent amount 3-B ) ) Money Market ention % 7pts 4. What is the effective annual interest rate on Newca s 3 yr $15.0 million debt issue in the USA at LIBOR 2? Upfront origination fee = 2.0%, if UBOR stays steady at 3.0% for all 3 years of floating rate loan Interest paid annually at yr-end! T = Loan Cash Flow T1 Loan Cash Flow T.2 Loan Cash Flow T3 Loan Cash Flow 3. AMERI-Corp. will receive 5,000,000 Pounds (P) in 270 days ( =.75 yr) from a European customer. AMERI-Corp is concerned about exchange rate risk on the future US$ value of this receivable and wants to compare a Money Market or Option hedge. Spot rate today is $1.30/P ANNUAL deposit (investing) rate is: Europe = 4.0% USA = 2.4% ANNUAL borrowing rate is: Europe = 5.0%: USA = 3.69 A CALL option is available with 270 days to maturity with a strike price of $1.31/ P with a premium of $.015/P A PUT option is available with 270 days to maturity with a strike price of $1.305 / P with a premium of $.022/P AMERI-Corp forecasted the +270-day future expected Spot Rate as follows: $1.285/P 15% prob. $1.295 / P 30% prob. $1.310 /P 40% prob. $1.325 / P 15% prob. QUES. 3-A-B-C Estimate the amounts that AMERI-Corp can expect by hedging among: $ 3-A 10pts MONEY MARKET hedge equivalent amount 3-B ) ) Money Market ention % 7pts 4. What is the effective annual interest rate on Newca s 3 yr $15.0 million debt issue in the USA at LIBOR 2? Upfront origination fee = 2.0%, if UBOR stays steady at 3.0% for all 3 years of floating rate loan Interest paid annually at yr-end! T = Loan Cash Flow T1 Loan Cash Flow T.2 Loan Cash Flow T3 Loan Cash Flow