San Antonio Boot Company. San Antonio Boot Company of San Antonio, Texas, has received an order for 200,000 pairs of western-cut boots and Ropers from TESCO, of Great Britain, payment to be in British pounds sterling. The boots will be shipped to TESCO under the terms of a letter of credit issued by the Bank of England on behalf of TESCO. The letter of credit specifies that the face value of the shipment, 20,000,000, will be paid according to the following terms after the Bank of England accepts a time draft drawn in accordance with the terms of the letter of credit.

Terms: 50% Down-payment at the Spot Rate

50% in 180 Days.

The current discount rate in London on 180-day bankers acceptances is 7% per annum, and TESCOs weighted average cost of capital is 7% per annum. The commission for selling a bankers acceptance in the discount market is 1.05% of the face amount.

(A)Would the San Antonio Boot Company gain by holding the acceptance to

maturity as compared to discounting the bankers acceptance at once?

(a) Hold

(b) Sell

(B)What is the cost to hedge in each of the following techniques?

(1)Forward Hedge:

(a) $650,000 (b) $660,000 (c) $675,000 (d) $677,000

(2) Money Market Hedge:

(a) $554,786 (b) $557,534 (c) $563,892 (d) $566,890

(3) Options Hedge:

(a) $602,870 (b) $604,000 (c) $604,340 (d) $605,123

(4) Based on the above calculations, which technique would you use?

(a) Forward Hedge (b) Money Market Hedge (c) Option Hedge