Question
Texas Traders (TT for short) is a US based firm that has entered into a deal to sell Texas beer to an importer in South
Texas Traders (TT for short) is a US based firm that has entered into a deal to sell Texas beer to an importer in South Korea.
The terms of the deal are as follows:
Value of the deal: 200 Billion Won
Payment terms (note: payment is to be made in Korean Won):
10% down payment, with the rest split equally over 75 days and 240 days.
Exchange rates: Spot (Bid, Ask): 0.00087 – 0.00089
75-day Forward Rates: 0.00087 – 0.00092
240-day Forward Rates: 0.00070 – 0.00083
Borrowing, Lending rates in Korean Won: 12%, 10% [75 days], and 14%, 11% [240 days]
Put and Call Options are available:
CALL: Strike price: 0.00080, option premium = 6%, American, expires in 240 days.
PUT: Strike price: 0.00084, option premium = 18%, American, expires in 240 days.
TT cost of capital: 10%
Management is wondering on the best hedging method for TT. Can you help them?
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
HEDGING Won 200 billion RECEIVABLE FORWARD HEDGE Down Payment10200 billion20 billion Won Spot rate for Selling Won 000087Won A Amount to be received n...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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