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answer it step by step and show work Drake Ltd., a U.S. based MNC, has just signed a contract to purchase industrial machinery from a
answer it step by step and show work
Drake Ltd., a U.S. based MNC, has just signed a contract to purchase industrial machinery from a manufacturer in UK for 61,250,000. The purchase was made in November with payment due six months later in May. Because this is a sizable contract for the firm and because the contract is in pounds rather than U.S, dollars, Drake is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision, you have gathered the following information. - The spot exchange rate is US $1.282160/E - The six-month forward rate is quoted at +72.2 points. - The UK 6 -month borrowing rate is 3.50% per annum (or 1.750% for 6 months) - The UK 6 -month lending rate is 2.5% per annum (or 1.250% for 6 months) - The U.S. 6-month borrowing rate is 3.25% per annum (or 1.625% for 6 months) - The U.S. 6 -month lending rate is 1.50% per annum (or 0.75% for 6 months) - May put options for 262,500 ; strike price US\$1.2800, premium price is US\$.005840/E. - May call options for {62,500; strike price US\$1.2950, premium price is US\$.003600/E. - Drake's own forecast for 6 -month spot rates is $1.282160/E. Q1. Compare four alternative hedging choices (Remain unhedged, forward hedge, money market hedge, and options hedge) and make a recommendation based on your analysis. Q2. Redo the analysis assuming that Drake Ltd, has an account receivable of {1,250,000, instead. Again, compare four alternative hedging cholces (Remain unhedged, forward hedge, money market hedge, and options hedge) and make a recommendation based on your analysis Step by Step Solution
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