Recently signed a contract to sell pharmaceutical products

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Reference no: EM131933710

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 could hedge the MYR receivables in the money market. Using the information provided, how much would the money market hedge return in 9 months, assuming that it can reinvest the proceeds at the U.S. lending rate?

Reference no: EM131933710

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