Show all work for maximum credit. The grade is calculated as (1 correct/35)*100. Manatee Industrial Inc. of Florida purchased computer equipment from Maple Leaf Tech. of Canada for C$6,000,000 with payment due in 3 months. The forecasting department of the firm expects the spot rate in six months to be $.7915/C$ The following quotes are available: Three month investment interest rate on US$ 0.80% per annum Loan rate on US$ 3.96% per annum Three month investment interest rate on C$ 2.20% per annum Loan rate on C$ 4.80% per annum Spot exchange rate Bid $.7950/C$ Ask $.7958/C$ Three month forward rate Bid $.7905/C$ Ask $.7920/C$ Three month call option on C$6,000,000 at an exercise price of $0.8000/C$ and a 1.5% of spot ask premium. MII's cost of capital is 12% and it wishes to minimize the dollar cost of this payable. The CFO has informed your department that the company is currently in a low cash position and if a money market hedge is used, a U.S. dollar loan would be necessary. However, the option premium should be carried forward at the cost of capital. 1. (12 points) What is the cost using the money market hedge? 2. (4 points) What is the cost using the forward market hedge? 3. (8 points) What is the maximum cost of the option hedge? (Remember include the FV premium and exercise value). 4. (7 points) At what ending spot rate would the forward market hedge cqual the call option hedge? 5. (2 points) Based on the forecast, which technique of the 3 above has the cheapest cost? 6.(2 points) If the future spot rate fell to $.76/C$, which technique is the cheapest? Show all work for maximum credit. The grade is calculated as (1 correct/35)*100. Manatee Industrial Inc. of Florida purchased computer equipment from Maple Leaf Tech. of Canada for C$6,000,000 with payment due in 3 months. The forecasting department of the firm expects the spot rate in six months to be $.7915/C$ The following quotes are available: Three month investment interest rate on US$ 0.80% per annum Loan rate on US$ 3.96% per annum Three month investment interest rate on C$ 2.20% per annum Loan rate on C$ 4.80% per annum Spot exchange rate Bid $.7950/C$ Ask $.7958/C$ Three month forward rate Bid $.7905/C$ Ask $.7920/C$ Three month call option on C$6,000,000 at an exercise price of $0.8000/C$ and a 1.5% of spot ask premium. MII's cost of capital is 12% and it wishes to minimize the dollar cost of this payable. The CFO has informed your department that the company is currently in a low cash position and if a money market hedge is used, a U.S. dollar loan would be necessary. However, the option premium should be carried forward at the cost of capital. 1. (12 points) What is the cost using the money market hedge? 2. (4 points) What is the cost using the forward market hedge? 3. (8 points) What is the maximum cost of the option hedge? (Remember include the FV premium and exercise value). 4. (7 points) At what ending spot rate would the forward market hedge cqual the call option hedge? 5. (2 points) Based on the forecast, which technique of the 3 above has the cheapest cost? 6.(2 points) If the future spot rate fell to $.76/C$, which technique is the cheapest
