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Rubbermaid must pay a Euro-denominated payable of €100,000 in 120 days. The current spot rate of the euro is $1.2750 and the 120 forward rate quoted today is $1.3550. Sherwin is worried that the euro will appreciate over the next 120 days, increasing the dollar cost of their euro receivable. To hedge this risk, they enter into a forward contract with their bank to “buy euros forward” at the forward rate of $1.3550. Assume that 120 days later, Sherwin executes the contract to buy €100,000 at the contracted forward rate of $1.3550. Assume also that the spot rate at that time is $1.3200.
(a) How many dollars did Sherwin have to pay for the €100,000 by executing the forward contract?
(b) How many dollars would Sherwin have had to pay for the euros if they had not hedged with a forward contract but instead purchased euros in the spot market when the payable was due?
(c) Now assume that the spot rate at the time the payable is due is $1.3255. How much did Sherwin save or lose by purchasing their euros through the forward contract rather than on the spot market?
You are considering a stock investment in one of two firms (AllDebt, Inc., and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $7.00 million. Calculate the income available to pay the asset funders ..
Contoso Corp just paid a $2 dividend per share. It is anticipated that the dividend payments grow at a rate of 5% a year (forever). If the stock of Contoso Corp sells for $50 per share, what is the required rate of return?
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In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $250 in March 2042, but investors would receive nothing until then. ..
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You estimate that you will need $691 thousand in 30 years to buy some cybernetic body enhancements, including infrared vision, retractable claws, and expanded brain storage capacity. To achieve your financial goal, you want to make three equal-sized ..
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Consider a stock paying continuous dividends of 1%. Assume r = 0.06, σ = 0.32 and today’s stock price of S0 = 33. You sell 100 Calls with strike K = 35 and expiration in 68 days (assume 365 days in a year). You also construct a delta-hedge to manage ..
Which of the following have reduced or eliminated mutual fund coverage?
In 2015, it was revealed that Volkswagen (VW) had installed software on its diesel cars in order to circumvent US emissions tests. Carefully, outline what this scandal involved, and explain why the actions of the VW management were unethical.
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