4. Mitsubishi Heavy Industry (MHI) in New Jersey sold a ship to Princess Cruise Company (PCC) in Bremen. PCC owes MHI 500 million euros in one year. The current spot rate is 1.18 $/€ and the one-year forward rate is 1.20 $/€. The annual interest rate is 3% in Europe and 5% in the U.S. MHI can also buy a one-year call option on euros at the strike price (E) of 1.21 $/€ for a premium of 0.015 $ per euro. MHI can also buy a put option on euros at same strike price (E) of 1.21 $/€ for a premium of 0.042 $ per euro. You are the treasurer of MHI, so you have an account receivable. a) Compute the future dollar revenue of meeting this collection using the money market hedge and the forward hedge. b) Calculate the minimum amount to be collected hedging with options. c) Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar revenue of meeting this collection when the option hedge is used. d) At what future spot rate do you think MHI may be indifferent between the option and M-M hedge?

4. Mitsubishi Heavy Industry (MHI) in New Jersey sold a ship to Princess Cruise Company (PCC) in Bremen. PCC owes MHI 500 million euros in one year. The current spot rate is 1.18 $/€ and the one-year forward rate is 1.20 $/€. The annual interest rate is 3% in Europe and 5% in the U.S. MHI can also buy a one-year call option on euros at the strike price (E) of 1.21 $/€ for a premium of 0.015 $ per euro. MHI can also buy a put option on euros at same strike price (E) of 1.21 $/€ for a premium of 0.042 $ per euro. You are the treasurer of MHI, so you have an account receivable. a) Compute the future dollar revenue of meeting this collection using the money market hedge and the forward hedge. b) Calculate the minimum amount to be collected hedging with options. c) Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar revenue of meeting this collection when the option hedge is used. d) At what future spot rate do you think MHI may be indifferent between the option and M-M hedge?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 55QA

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