4.

Texas Traders (TT for short) is a US based firm that has entered into a deal to sell Texas beer to an importer in South Korea. The terms of the deal are as follows. Value of the deal: 300 Billion Won

Payment terms (note: unless otherwise stated payment is to be made in Korean Won):

25% down payment, with the rest split equally over 85 days and 230 days.

Note: 50% of the payment made in 230 days is to be made in US Dollars.

Exchange rates: Spot (Bid, Ask): 0.00078 0.00092

85-day Forward Rates: 0.00075 0.00084

230-day Forward Rates: 0.00062 0.00069

Borrowing, Lending rates in Korean Won: 14%, 9% [85 days], and 22%, 16% [230 days]

Put and Call Options are available:

CALL: Strike price: 0.00080, option premium = 6%, American, expires in 240 days.

PUT: Strike price: 0.00084, option premium = 17%, American, expires in 84 days.

TT cost of capital: 11%

Management is wondering on the best hedging method for TT. Can you help them?

part B

San Antonio Importers (SAI for short) is a US based firm that has entered into a deal to buy Italian shoes from a firm in Palermo, Italy. The terms of the deal are as follows: Value of the deal: 170 million Euros.

Payment terms (note: payment is to be made in Euros, unless otherwise stated):

22% down payment, with the rest split equally over 110 days and 330 days.

Exchange rates: Spot (Bid, Ask): 1.3554 1.3592

110-day Forward Rates: 1.3576 1.3662

330-day Forward Rates: 1.3815 1.3902

Borrowing, Lending rates in Euros: 11%, 7% [110 days], and 14%, 11% [330 days]

Put and Call Options are available:

CALL: Strike price: 1.3745, option premium = 12%, American, expires in 180 days.

PUT: Strike price: 1.3740, option premium = 5%, American, expires in 180 days.

SAI cost of capital: 17%

Management is wondering on the best hedging method for SAI. Can you help them?