ch 5

Kansas Corporation, an American company, has a payment of 6 million due to Tuscany Corporation one year from today. At the prevalling spot rate of 0.90e/$, this would cost Kansas $6,666,667, but Kansas faces the risk that the /$ rate will fall in the coming year, 50 that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two poss ble strategles. Strategy 1 is to buy C6.0 million forward today at a one-year forward rate of 0.89E/$. Strategy 2 is to pay a premium of $110,000 for a one-year call option on 66 million at an exchange rate of 0.88C/s. a. Suppose that in one year the spot exchange rate is 0.85/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount. b. Suppose that in one year the spot exchange rate is 0.95e/S. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount