What is the expected benefit to hedging

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I. You are the manager of Coles Supermarkets Australia Pty Ltd that has an equal chance of earning either $20 000 or $40 000 before taxes. Your company is subject to a 20% tax rate on the first $30 000 and 35% on all income earned beyond that point. If you are offered a costless hedge to achieve guaranteed before-tax earnings of $30 000, what is the expected benefit to hedging?

II. The spot exchange rate for the Thai bhat is 33.14 bhat to the dollar. The Hotel Grand Chancellor Hobart will be able to repatriate profits from its luxury resort hotel in Phuket in five years. It has estimated the five-year forward rate at 38 bhat to the dollar. The risk-free rate in the Australia is 4% and Hotel Grand Chancellor Hobart uses an 11% risk premium for investments of this type. If the expected accumulated profits after five years are 100 million bhat, what is the present value in Australian dollars?

Reference no: EM133072583

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