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Exposure in forward market at the available forward rate

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Reference no: EM131933671

DLK (U.S.A.) recently signed a contract to sell pharmaceutical products to Apex Medicals, a Malaysian distributor of drugs, for MYR 40,000,000. [MYR = Malaysian ringgit] The sale was made in March with payment due 9 months later in December. Because this is a sizable contract for the firm and because the contract is in MYR rather than USD, DLK is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:

Spot rate = USD 0.24 / MYR

Forward rate = USD 0.22 / MYR

DLK’s forecasted rate = USD 0.20 / MYR

Malaysian borrowing rate = 10% per year

Malaysian lending rate = 8% per year

US borrowing rate = 4% per year

US lending rate = 3% per year

DLK’s WACC = 5% per year

Dec put options on MYR: Strike price = 0.24/USD, premium is 1.8%

DLK chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 9 months will be ________.

A. USD 8,000,000

B. USD 181,820,000

C. USD 8,800,000

D. USD 200,000,000

Reference no: EM131933671

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