Is namibian firm better off not hedging for currency risk

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A firm ABC CC wants to undertake an investment project which costs N$500,000, which it wants to finance through a bank loan. The project has a 90 percent chance of success. If the project succeeds the firm will make a cash flow of N$1,200,000 after a year. If it fails the firm will get a cash flow of N$300,000 and will be required to pay back only half of the borrowed amount. The bank has a required rate return of 15%.

Problem 1: What is the minimum amount that ABC Holdings expects to receive for its subsidiary if it uses a currency put option hedge? Briefly explain.

Problem 2: Which is the optimal hedge for the receivables? Explain.

Problem 3: Which is the optimal hedge for the payables? Explain.

Problem 4: Is the Namibian firm better off not hedging for currency risk? Briefly explain.

Reference no: EM132979448

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