Question
Micca Metals, Inc.Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials
Micca Metals, Inc.Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials that are used in a variety of pigment applications in many industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for
6,400,000dirhams, payable in six months. Six-month call options on6,400,000dirhams at an exercise price of 11.30 dirhams per dollar are available from Bank Al-Maghrub at a premium of 1.8%. Six-month put options on 6,400,000 dirhams at an exercise price of 11.30 dirhams per dollar are available at a premium of 3.1%. Using the exchange rate and interest rate data in the popup window, , compare alternate ways below that Micca might hedge its foreign exchange transaction exposure.
a. How much in U.S. dollars will Micca pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be 11.30 dirhams per dollar? 11.90 dirhams per dollar?
b. How much in U.S. dollars will Micca pay in 6 months with a forward market hedge?
c. How much in U.S. dollars will Micca pay in 6 months with a money market hedge?
d. How much in U.S. dollars will Micca pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than11.30 dirhams per dollar?
e. What is your recommendation?
i - X Data Table Assumptions Values Shipment of phosphates from Morocco, Moroccan dirhams 6,400,000 Micca's cost of capital (WACC) 14.00% Spot exchange rate, dirhams/$ 11.30 6-month forward rate, dirhams/$ 11.90 6-month interest rate for borrowing, Morocco (per annum) 7.00% 6-month interest rate for investing, Morocco (per annum) 6.00% 6-month interest rate for borrowing, U.S. (per annum) 5.00% 6-month interest rate for investing, U.S. (per annum) 4.00% Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet. Print Done i - X Data Table Assumptions Values Shipment of phosphates from Morocco, Moroccan dirhams 6,400,000 Micca's cost of capital (WACC) 14.00% Spot exchange rate, dirhams/$ 11.30 6-month forward rate, dirhams/$ 11.90 6-month interest rate for borrowing, Morocco (per annum) 7.00% 6-month interest rate for investing, Morocco (per annum) 6.00% 6-month interest rate for borrowing, U.S. (per annum) 5.00% 6-month interest rate for investing, U.S. (per annum) 4.00% Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet. Print DoneStep by Step Solution
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