Bridge Ltd is an MNE with its holding company located in Sydney, Australia. It has a Canadian subsidiary which has declared a dividend of ten million Canadian Dollars (CAD), payable in three months from Toronto to the holding company in Sydney.

You are considering hedging your exposure to CAD. The following quotes are available.

Spot exchange rate CAD1.155 / AUD

Expected spot rate in 3 months CAD1.2 / AUD

3-month forward rate CAD1.1579 / AUD

3-month CAD interest rate 4% per annum

3-month AUD interest rate 3% per annum

3-month put option on CAD at strike price of CAD1.2300 / AUD, premium of AUD 0.0150 / CAD.

Bridge's opportunity cost of capital, 10% per annum.

Give all answers to the nearest number.

a) What are the costs of each alternative for hedging the dividend receivable by the Australian Subsidiary?

i. Do nothing - remain uncovered. Assume the spot rate today is the same as the current spot rate (.75 Mark)

Answer

ii. Do nothing - remain uncovered. Assume the spot rate today is the same as the expected spot rate in 3 months (.75 Mark)

Answer

iii. Money market hedge. (7.5 marks)

This would require the MNE to "Answer: borrow from or invest with?" a "Answer: Canadian or australian" Based Bank

The amount they would borrow/invest is how much "Answer"

They would exchange this into "Answer" in the spot market

The final proceeds in 3 months will be "Answer"

At maturity they would repay the "Answer : canadian or australian" Based Bank "Answer"

iv. Buy a 3 months put on the CAD. (6 marks)

Assuming the option is exercised the amount received will be "Answer"

The cost of the option will be "Answer"

The opportunity cost of the premium will be Answer

Net proceeds will be Answer

If the option is not exercised the net proceeds (Assuming the rate is CAD1.2 / AUD)will be: Answer