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assignment for financial calculations and interpretations

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Question;In brief, you have made arrangements for the purchase of a commercial property in Copenhagenfor DKK 134.00 million. The functional currency of your company is the US dollar. Byseeking a substantial amount of help and guidance from your real estate agent, lots of detailedarrangements, including signing of the contract, computing the closing costs, funding thepurchase, etc., have already been taken care of. The only remaining item that is the subject ofthis inquiry is a lump sum payment of DKK 4,500,000.00 upon the occupancy (delivery) of theproperty, which is scheduled for three months from today.Considering the variations in the currency market these days, you are very concerned that yourexpected payment of DKK 4,500,000.00 million may impose unnecessary foreign exchange riskfor your company. You are considering several hedging alternatives to reduce the exchange raterisk arising from this purchase. The following information is made available to you today:? The spot exchange rate is DKK 5.66/$? The three month forward rate is DKK 5.92/$? Forecast of the management for the end of the third month is DKK 5.60/$? The company?s cost of capital is 12 percent per year.? The Danish 3-month borrowing or lending rate is 6 % per annum? The U.S. 3-month borrowing or lending rate is 3.4 % per annum? A call or put option for the strike price of DKK 5.85/$ carries a premium of 1.25 percentfor this period.Based on the above information, first read further instructions below, then answer the ensuingFIFTEEN questions (why so many? See above!).1. If your company chooses to hedge this exposure in the forward market, calculate the outcomeof this hedge in the US dollar.2. If your company chooses to hedge this exposure in the forward market, the outcome of thishedge in the US dollar is certain (=1, enter 1 in the template or in the ?transmittal form?),risky (=2, enter 2 in the template or in the ?transmittal form?), certain and risky (=3, enter 3 inthe template or in the ?transmittal form?).

 

Paper#48010 | Written in 18-Jul-2015

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