Question
Mili Pharmaceuticals is based in New Delhi, India, and has a 4-year contract to produce chemicals at a production facility located in Delaware, United States
Mili Pharmaceuticals is based in New Delhi, India, and has a 4-year contract to produce chemicals at a production facility located in Delaware, United States of America. Mili received $80,000 per year and is concerned about the exchange risk she will bear exchanging US Dollars (USD) to Indian Rupees (INR) over this period. Luckily, Neel Aeronautics, a US firm doing business with India, has the exact opposite currency exposure. Mili and Neel agree to a currency swap in order to hedge their exchange risk. Assume the US risk free rate is 2%, the Indian risk-free rate is 2.8%, and the exchange rate between USD ($) and INR () is 80.00/$ (80.00 Rupees can be exchanged for 1 USD). (3 points)
rus = 0.02 , rin = 0.028 , S0 = 80.00 /$ a) What is the present value of Mili's 4-year cash flow in USD, compounded continuously? b) Next, Mili wants to borrow this amount of USD, convert it to INR at today's spot rate, and lend it to Neel. What is her loan to Neel in INR? c) Neel will repay her loan with 4 even payments in INR. What is the value of one of his yearly payments? (Hint: you are solving for the coupon) d) What is Mili's net cash flow at the start of the contract, time zero? e) What is Mili's net cash flow during a given year? f) Explain briefly how this has hedged Mili's foreign exchange risk.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started