Kansas Corporation, an American company, has a payment of 5.2 million due to Tuscany Corporation...
90.2K
Verified Solution
Link Copied!
Question
Accounting
Kansas Corporation, an American company, has a payment of 5.2 million due to Tuscany Corporation one year from today. At the prevailing spot rate of 0.90/$, this would cost Kansas $5,777,778, but Kansas faces the risk that the /$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy 5.2 million forward today at a one-year forward rate of 0.89/$. Strategy 2 is to pay a premium of $102,000 for a one-year call option on 5.2 million at an exchange rate of 0.88/$. a. Suppose that in one year the spot exchange rate is 0.85/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount. b. Suppose that in one year the spot exchange rate is 0.95/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
