Reference no: EM13508575
Metalgesselschaft, a leading German metal processor, has scheduled a supply of 20,000 metric tons of copper for October 1. On April 1, copper is quoted on the London Metals Exchange at £562 per metric ton for immediate delivery and £605 per metric ton for delivery on October 1. Monthly storage costs are £10 for a metric ton in London and DM 30 in Hamburg, payable on the first day of storage. Exchange rate quotations are as follows: The pound is worth DM 3.61 on April 1 and is selling at a 6.3% annual discount. The opportunity cost of capital for Metalgesselschaft is estimated at 8% annually, and the pound sterling is expected to depreciate at a yearly rate of 6.3% throughout the next 12 months.
Compute the DM cost for Metalgesselschaft on April 1 of the following options:
*Problem contributed by Laurent Jacque.
a. Buy 20,000 metric tons of copper on April 1 and store it in London until October 1.
b. Buy a forward contract of 20,000 metric tons on April 1, for delivery in six months. Cover sterling debt by purchasing forward pounds on April 1.
c. Buy 20,000 metric tons of copper on October 1.
Can you identify other options available to Metalgesselschaft? Which one would you recommend?
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