Chapter 8 Homework (10 points) 1. (Payables) Suppose Boeing imported a Rolls-Royce jet engine for 2 million payable in one year The U.S. interest rate: 5.00% per annum The U.K. interest rate: 6.50% per annum The spot exchange rate: $1.325/ The forward exchange rate: $1.375/ (1-year maturity) Call option premium = $0.02, Strike price = $1.35. If the future spot price is expected to be $1.425/ and assume that the company borrows money to buy the option. Compute the cost to the company in US Dollars using a. Forward Hedge (1 point) b. Money-Market Hedge (2 points) c. Call option (2 points)

2. (Receivables) (2 points) Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest rate is 4% and US interest rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge and calculate how much the firm would receive in US Dollars.

3. (Receivables) (3 points) LSU Corp. has future receivables of 4,000,000 New Zealand dollars (NZ$) in one year. Information is provided on both the call and the put options. Determine which option the firm must use and how much the company would receive in US Dollars in each of the future spot rate scenarios and the overall cost using probabilities. Assume that the company has funds for the option premium and does not have to borrow funds. Spot rate of NZ$ = $.54

One year call option: Exercise price = $.50; premium = $.07

One year put option: Exercise price = $.52; premium = $.03

Forecasted spot rate of NZ$ Rate Probability $.50 20% .51 50 .53 30