Reference no: EM131556769

Ganado, the US-based company discussed in this chapter, has concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of £3,300,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14.795% per annum (due to credit concerns of the British banks). The exchange rates and interest rates are listed as follows:

90-day A/R in pounds                              3,300,000

Spot rate ($/pound)                                   1.7503

90-day forward rate ($/pound)                  1.7395

3-month U.S. borrowing interest rate          9.054%

3-month U.K. borrowing interest rate        14.795%

Ganado's WACC                                     11.906%

Put options on the British pound:

Strike rate ($/pound)                         1.7300

Put option premium                          1.5%

Compare alternate ways below that Ganado might hedge its foreign exchange transaction exposure (assuming a 360-day financial year):

(1) How much in U.S. dollars will Ganado receive in 90 days without a hedge (a) if the expected spot rate in 90 days is the same as the current spot rate of $1.7503/£? (b) if the expected spot rate in 90 days is $1.7976/£?

(2) How much in U.S. dollars will Ganado receive in 90 days with a forward market hedge?

(3) How much in U.S. dollars will Ganado receive in 90 days with a money market hedge?

(4) How much in U.S. dollars will Ganado receive in 90 days with an option market hedge?

(5) What transaction exposure hedge is in Ganado's best interest?