4. Call option hedge. (Need to buy dirhams = call on dirhams) Option principal Current spot rate, dirhams/$ Premium cost of option Option premium (principal/spot rate x % pm) 6,000,000.00 10.00 2.000% S 12,000.00 600,000.00 12,516.000 612,516.00 Maximum. 13,392.120 613,392.12 if WACC=14% ption exercised, dollar cost at strike price of 10.00 dirhams/$ Plus premium carried forward six months (WACC) Total net cost of call option hedge if exercised S Plus premium carried forward six months (WACC) Total net cost of call option hedge if exercised S The lowest cost certain alternative is the forward. If Micca were to expect the dirham to depreciate significantly over the next six months, it may choose the call option. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment applications in many other industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for 6,000,000, dirhams, payable in six months. Micca's cost of capital is 8.600%. Six-month call options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available from Bank Al-Maghrub at a premium of 2%. Six-month put options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available at a premium of 3%. Compare and contrast alternative ways that Micca might hedge its foreign exchange transaction exposure. What is your recommendation? Assumptions Shipment of phosphates from Morocco, Moroccan dirhams Micca's cost of capital (WACC) Spot exchange rate, dirhams/$ Six-month forward rate, dirhams/$ Options on Moroccan dirhams: Strike price, dirhams/$ Option premium (percent) Values 6,000,000 8.600% 10.00 14.00% 10.40 Call Option Put Option 10.00 10.00 2.000% 3.000% United States Morocco Six-month interest rate for borrowing (per annum) 6.000% 8.000% Six-month interest rate for investing (per annum) 5.000% 7.000%