Question
TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEKs Italian
TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEKs Italian unit does not have ready access to local currency borrowing, eliminating the money market hedge alternative. Citibank has offered TEK the following quotes:
| Spot rate | USD1.2000/EUR |
| 3 month forward rate | USD1.2180/EUR |
| Three month euro interest rate | 4.2% per year |
| 3 month put option on euros at strike price of USD1.0800/EUR | 3.4% |
| TEKs weighted average cost of capital | 9.8% |
In the context of this information, match the following graph with the appropriate labels (note there are fewer blanks than available responses):
| What is the label for line A? | Answer 1Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line B? | Answer 2Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line C? | Answer 3Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line D? | Answer 4Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line E? | Answer 5Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line F? | Answer 6Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line G? | Answer 7Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line H? | Answer 8Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line I? | Answer 9Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days |
| What is the label for line J? | Answer 10Choose...-USD32,000PremiumUSD1.2260/EUR1USD1.2100/EUR1USD32,000Put Option HedgeHedged ReceivableShort ForwardUSD1.2180/EUR1Unhedged ReceivableForward Market HedgeS(USD/EUR)90 days
|
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Financial and Managerial Accounting Information for Decisions
Authors: John Wild, Ken Shaw, Barbara Chiappetta
5th edition
978-1259347641
