Norga Oil Inc. is a U.S oil & Gas firm. The company purchases crude oil from different countries and provides it it to U.S refineries. Norga Oil just purchased inputs from Morroco for 8,000,000 dirhams, to be paid in six months. Norga's cost of capital(WACC) is 10%. Following quotations are available in market: A six-month put option on 8,000,000 dirhams with an exercise price of 10.00 dirhams per dollar has a premium of 3%. A six-month call option on 8,000,000 dirhams with an exercise price of 10 dirhams per dollar has a premium of 2%. six-months Forward rate 10.40 dirhams/$ Six-months interest rate for borrowing: o Unites states : 4% p.a; Morocco: 6% p.a Six-months interest rate for investing o Unites states : 3% p.a; Morocco: 5% p.a a) Fill in the Table below prepared by one of the finance staff of Nolga Oil. b) What will be your advice/recommendation to Norga Oil in terms of; i. The lowest certain cost alternative. ii. The best option if Norga Oil expects the Dirham to depreciate significantly in the next few months. Attention: DO NOT utilise the memory function of calculator, but use the values as you gradually enter(No comma separator, round to nearest number to 2 decimal places). Risk Management Alternatives Values Certainty 1. Remain uncovered Account payable (dirhams) 8,000,000 10.00 $ Possible spot rate in six months-the current spot rate (dirhams/$) Cost of settlement in six months spot (US$) Possible spot rate in six months - forward rate (dirhams/$) Cost of settlement in six months forwards (US$) $ 2. Forward market hedge. Buy dirhams forward six months. Cost of settlement in six $ months (US$) 769,230.77 3. Money market hedge. Exchange dollars for dirhams now, invest for six months. Dirhams needed now for $ investing US dollars needed now $ US dollar cost, in six months, of settlement 4. Option principal Current spot rate, dirhams/$ 8,000,000.00 10.00 Premium cost of option % Option premium $ If option exercised, dollar cost Plus premium carried forward $ Total net cost of option hedges 2 if exercised ii) The lowest cost certain alternative is the . If Norga Oil were to expect the dirham to depreciate significantly over the next six months, it may choose the Norga Oil Inc. is a U.S oil & Gas firm. The company purchases crude oil from different countries and provides it it to U.S refineries. Norga Oil just purchased inputs from Morroco for 8,000,000 dirhams, to be paid in six months. Norga's cost of capital(WACC) is 10%. Following quotations are available in market: A six-month put option on 8,000,000 dirhams with an exercise price of 10.00 dirhams per dollar has a premium of 3%. A six-month call option on 8,000,000 dirhams with an exercise price of 10 dirhams per dollar has a premium of 2%. six-months Forward rate 10.40 dirhams/$ Six-months interest rate for borrowing: o Unites states : 4% p.a; Morocco: 6% p.a Six-months interest rate for investing o Unites states : 3% p.a; Morocco: 5% p.a a) Fill in the Table below prepared by one of the finance staff of Nolga Oil. b) What will be your advice/recommendation to Norga Oil in terms of; i. The lowest certain cost alternative. ii. The best option if Norga Oil expects the Dirham to depreciate significantly in the next few months. Attention: DO NOT utilise the memory function of calculator, but use the values as you gradually enter(No comma separator, round to nearest number to 2 decimal places). Risk Management Alternatives Values Certainty 1. Remain uncovered Account payable (dirhams) 8,000,000 10.00 $ Possible spot rate in six months-the current spot rate (dirhams/$) Cost of settlement in six months spot (US$) Possible spot rate in six months - forward rate (dirhams/$) Cost of settlement in six months forwards (US$) $ 2. Forward market hedge. Buy dirhams forward six months. Cost of settlement in six $ months (US$) 769,230.77 3. Money market hedge. Exchange dollars for dirhams now, invest for six months. Dirhams needed now for $ investing US dollars needed now $ US dollar cost, in six months, of settlement 4. Option principal Current spot rate, dirhams/$ 8,000,000.00 10.00 Premium cost of option % Option premium $ If option exercised, dollar cost Plus premium carried forward $ Total net cost of option hedges 2 if exercised ii) The lowest cost certain alternative is the . If Norga Oil were to expect the dirham to depreciate significantly over the next six months, it may choose the
