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It is July 1 , 2 0 2 0 . You work as an analyst for Elsa Frigorifics in Lake Wobegon, MN . Jorgen Bjorgen,
It is July You work as an analyst for Elsa Frigorifics in Lake Wobegon, MN Jorgen Bjorgen, the CEO, has ordered a pair of advanced icereplicators from Germany. The equipment will cost million, due in Euro, one year from now on July Jorgen is concerned about the foreign exchange exposure of this upcoming payment. During the last months, currency market volatility has been unusually high, fueled mostly by uncertainty about the potential weakness of the US dollar. If the dollar cost of the equipment ends up being above $ million the project is not profitable anymore. Diagonal Alley Bank offers the following spot rate and months forward points: Spot $ months $ In the interbank market, dealers quote forward points as pips pip is equal to To derive the outright forward rate, you need to add or subtract the appropriate forward points to or from the spot rate. If the forward bid points forward ask points forward premium add the forward points to the spot. If the forward bid points forward ask points forward discount subtract the forward points from the spot. You look at Bloomberg for interest rates to calculate a money market forward alternative USD rate months EUR rate months B Analyze the following alternative: Diagonal Alley Bank Forward Hedge Explain the implementation of this hedge and the cash flows at maturity. What is the exchange rate that Elsa Frigorifics would have to pay if they used this alternative? What is the $ cost of the machinery?
It is July You work as an analyst for Elsa Frigorifics in Lake Wobegon, MN
Jorgen Bjorgen, the CEO, has ordered a pair of advanced icereplicators from Germany.
The equipment will cost million, due in Euro, one year from now on July
Jorgen is concerned about the foreign exchange exposure of this upcoming payment. During the last months, currency market volatility has been unusually high, fueled mostly by uncertainty about the potential weakness of the US dollar. If the dollar cost of the equipment ends up being above $ million the project is not profitable anymore.
Diagonal Alley Bank offers the following spot rate and months forward points:
Spot $
months $
In the interbank market, dealers quote forward points as pips pip is equal to To derive the outright forward rate, you need to add or subtract the appropriate forward points to or from the spot rate. If the forward bid points forward ask points forward premium add the forward points to the spot. If the forward bid points forward ask points forward discount subtract the forward points from the spot.
You look at Bloomberg for interest rates to calculate a money market forward alternative
USD rate months
EUR rate months B Analyze the following alternative: Diagonal Alley Bank Forward Hedge
Explain the implementation of this hedge and the cash flows at maturity. What is the exchange rate that Elsa Frigorifics would have to pay if they used this alternative? What is the $ cost of the machinery?
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