If the distributor were to use a money market hedge what

Reference no: EM13623825

A distributor has just purchased DM375,000 worth of fine German beer for the central Ohio market and must pay for the beer in 90 days. The distributor is concerned about changes in the value of the German mark during that period and has accumulated the following information.

Exchange Rates:

Today's spot exchange rate S0($/DM) = 0.5019/0.5240

Exchange rate available on 3 mo. future contracts F1/4($/DM) = 0.5028

The distributor's estimate of the spot exchange rate in 3 months S1/4($/DM) = 0.5050/0.5220

option information call option put option
contract size : DM62500 DM62500
Exercise price : $0.5050/DM $0.5090/DM
Premium : $0.0010/DM $0.0012/DM

Annual interest rate information US Rates(%) German Rates (%)

Invest: 5(US rate) 4(German rate)
Borrow : 8(US rate) 6(German rate)

a. If the distributor were to remain unhedged, how much would he expect to pay--in dollars--for the beer? Draw the payoff pattern.

b. If the distributor were to hedge this exposure with an option, which type of option would he use? Assuming that the distributor's estimate of the future spot rate is accurate, how many dollars would he pay for the beer?

c. If the distributor were to use a money market hedge, what would he expect to pay--in dollars--for the beer? (Use a diagram to explain your answer.)

d. Given your answers to the above questions, which would be the better way to hedge the distributor's currency risk?

Reference no: EM13623825

Questions Cloud

A slide projector needs to create a 98-cm-high image of a : a slide projector needs to create a 98-cm-high image of a 2.0 cm slide. the screen is 300 cm from the slide. what focal

Singing fish fine foods has 2070000 for capital investments : 1singing fish fine foods has 2070000 for capital investments this year and is considering two potential projects for

Identify the null and alternative hypothesis determine the : the umuc daily news reported that the color distribution for plain mampms was 35 brown 20 yellow 20 orange 15 green and

A second coil with 410 turns is wound uniformly on top of : a toroidal solenoid has a mean radius of 12.0cm and a cross-sectional area of 4.00cm2 and is wound uniformly with 90.0

If the distributor were to use a money market hedge what : a distributor has just purchased dm375000 worth of fine german beer for the central ohio market and must pay for the

If 343 moles of this gas undergoes isothermal expansion at : a substance that is not an ideal gas has an equation of state given by pvsup2nbtsup2 where p is the pressure in

Consider an 8-month european put option on a treasury bond : consider an 8-month european put option on a treasury bond that currently has 14.25 years to maturity. the current cash

A uniform current density of 20 ampsm2 is flowing down a : a uniform current density of 2.0 ampsm2 is flowing down a cylindrical region of radius 3.0 meters.a use amperes law to

What is the number of trials n probability of successes p : mimi just started her tennis class three weeks ago. on average she is able to return 15 of her opponents serves. let

User Account

All Pages