Question
a)Firm AAA, located in the U.S., has a payable obligation of 500 million payable in one year to a bank in Japan. The current spot
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a)Firm AAA, located in the U.S., has a payable obligation of 500 million payable in one year to a bank in Japan. The current spot rate = 110/$, the one year forward rate = 125/$. The future dollar cost of meeting this obligation using the forward contract hedge is
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Insufficient information
$4,187,911
$4,000,000
$4,545,454
b)Firm AAA is located in the U.S.. It has sold a Germany firm 1,000,000 worth of product. The receivable will be collected a year later. Firm AAA will use put options to hedge the risk of the receivable. The put option has a strike price of $1.41. Firm AAA paid an option premium $0.01 per euro. Assume that at maturity one year later, the exchange rate= $1.20. Which of the following is correct.
Firm AAA will generate $1,350,000 on the sale net of the cost of hedging.
None of the above
Firm AAA will generate $1,420,000 on the sale net of the cost of hedging
Firm AAA will realize $1,400,000 on the sale net of the cost of hedging.
c)
Question: If firm AAA chooses to hedge its transaction exposure in the forward market, it will ________ euro forward at a rate of ________.
sell; $1.30
sell; euro 1.40
buy; $1.40
buy; $1.30
D)
Question: The call options for euro has a strike price $1.38, premium price is $0.02. If firm AAA chooses to hedge its transaction exposure using call option, the required amount in dollars to pay off the accounts payable in a year will be ________.
$1,380,000
$1,400,000
None of the above
$1,420,000
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