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Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable in one year. The current spot rate is ¥124/$ and the one-year forward rate is 110¥/$. The annual interest rate is in Japan is 5% for lending and 6% for borrowing; and in the United States it is 7% for lending and 8% for borrowing. The WACC is 7%. PCC can also buy a one-year call option on yen at the strike price of $0.0081 per yen for a premium of 0.00014$/¥.
1. Compute the future dollar costs of meeting this obligation using a money market hedge. Explain step by step using both numbers and a written explanation the money market strategy.
You would like to protect your portfolio of British equity against a downward movement of the British stock market. Which derivative can be used to achieve this?
Proust Manufacturing Co. produces personal fitness machines. The once successful line is no longer selling well, so the company is considering production of a new improved cardio-vascular machine. This can be done by buying needed production equipmen..
Sarah Andrews has boon the managing director of Ai-Sahel Corporation, a market leader in the technology sector, for over 15 years. For instance, do managerial level employees contribute more towards an innovative culture than non-managerial employees..
Consider a project with the following data: accounting break-even quantity = 19,000 units; cash break-even quantity = 13,000 units; life = four years; fixed costs = $130,000; variable costs = $50 per unit; required return = 15 percent. Ignoring the e..
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistic for the pro..
Brenda Callaway wants to borrow money to purchase some new appliances. The bank offered her a $1000 loan at 8 percent simple interest and an upfront service charge of $45. If she is required to pay the entire loan back at the end of one year, what is..
On January 1, 2006, Matt is obligated to make annual level payments for 16 years, beginning with a payment on January 1, 2007. His financial adviser told him that this liability has a Macaulay duration of 7.39 years. Determine the annual effective in..
Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L.- If these two options have the same payoffs, what does that tell us about how to price the options?
You own a bond with a 7.8 percent coupon rate and a yield to call of 8.7 percent. The bond currently sells for $1,102. If the bond is callable in five years, what is the call premium of the bond?
A 7 percent coupon bond with 8 years left to maturity is priced to offer a 7.75 percent yield to maturity . You believe that in one year, the yield to maturity will be 7.4 percent. What is the change in price the bond will experience in dollars?
Procrastinators Anonymous (PA) is hosting their annual convention this coming year in Dallas, TX. Although this is not typical of this organization, they wish to plan ahead to determine what the cost of the keynote banquet ticket should be. If a tick..
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.5 million, which will be depreciated straight-line to zero over its four-year life. what is the project’s aver..
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