In brief, you have made arrangements for the purchase of a commercial property in Copenhagen
Culbert
answer_21.docxAnswer 1
Amount to be paid if exposure hedged in the forward market = Expected payment/ exchange rate
Amount to be paid if exposure hedged in the forward market = DKK4,500,000/5.92
Amount to be paid if exposure hedged in the forward market = $760,135
The company needs to pay $760,135 after three months to pay off DKK 4,500,000.
Answer 2
Answer is “certain 1”
If a forward contract is taken, then the company becomes sure of the expected payment. It does not matter if the future spot rate is lower or higher than the forward market rate.
Answer 3
Company need to find out present value of future DKK payments = DKK4,500,000/1.0085 = DKK 4,462,072
Then company will convert the present value of DKK in USD = DKK4,462,072/5.66 = $788352 answer
Outcome of this hedge today is $788353
Answer 4
Answer 5
Outcome is “Known and Certain 4”
Answer 6
If the options market is employed as a hedge, and if the company eventually exercises the
option at the very end of the period, the amount from only exercising the option = Amount paid for DKK4,500,000/5.85 = $769,230
Answer 7
If the options market is employed as a hedge, and if the company eventually exercises the
option at the very end of the period, the total outcome of this hedge = Amount paid for DKK 4,500,000 + option premium + interest on option premium = DKK4,500,000/5.85 + DKK4,500,000*1.25% + DKK4,500,000*1.25%*3.4%*1/4 = $825,959
Answer 8
Cost of the option at the beginning of the period = DKK4,500,000* option premium rate = DKK4,500,000*1.25% = $56250
Answer 9
Cost of the option at the end of the period = Cost of the option at the beginning of the period * Interest rate
Cost of the option at the end of the period =$56250 + $56250*3.4%/4 = $56728
Answer 10
If the options market is employed as a hedge, and if on the very last day of the option
maturity, the spot rate would be DKK 5.98, the total outcome of the option hedge = Amount paid at the current spot rate (if spot rate is better than strike rate) + option premium + interest on option premium
Total outcome of the option hedge = DKK4,500,000/5.98 + 56250 + 56250*3.4%*1/4 = $809,236
Answer 11
If the options market is employed as a hedge, and if on the very last day of the option
maturity, the spot rate would be DKK 5.50, the total outcome of the option hedge = Amount paid at the strike price (if strike price is better than spot rate) + option premium + interest on option premium
Total outcome of the option hedge = DKK4,500,000/5.85 + 56250 + 56250*3.4%*1/4 = $825,958
Answer 12
Outcome is “unknown 2”
Answer 13
Outcome is “risky 2”
Answer 14
Amount to be paid after 3 months when no hedging technique applied and forecasted exchange rate values prove to be true = DKK 4,500,000/ 5.6 = $803,571
Answer 15
Agree 1
