FINA0105/FINA2383 International Financial Management – Solutions to Exercise #5

Question 1
Answer is (A).

100 + 115
= 107.5
2
25
× 100 = ¥23,255,814
107.5

Question 2

sh is ar stu ed d v i y re aC s ou o u rc rs e eH w e r as
o.
co m 1. The dollar amount it can receive in six months is S1  €1, 250,000 , where S1 is the spot rate in December.
2. If Plains State chooses to hedge its transaction exposure in the forward market at the available forward rate, its dollar payoff in six months will be 1, 250,000  0.8750  $1,093,750
3. Option Premium  €1,250,000 1.5%  0.8924  $16,732.5
11%
FV6months (Option Premium) = $16,732.5  (1 
)  $17,652.79
2
Min = 0.9 1,250,000  17,652.79  $1,107,347 (You would excise the option when S1  0.9 )
Max= S1 1,250,000  17,652.79 (You won’t exercise the option when S1  0.9 .)
4.

S1  1, 250, 000  1,107,347
1,107, 347
S1 
 $0.8859
1, 250, 00

When 1 > $0.8859/¥, Plains States would prefer the unhedged to the option market hedge.

Th

5. Plains States always prefer the option market hedge to the forward market hedge because Min
(Option market hedge) = $1,107,347 > $ 1,093,750.
Question 3

Let’s use the following notations:
S1 = $/won six months later.

X1 = 1/S1 = won/$ six months later.

(1) Remain unhedged
A/P = Won 6,030M
Cost of settlement in 6 months = 6,030M× S1

1 https://www.coursehero.com/file/11741985/Exercise5Solutions/ (2) Forward Market Hedge
Buy Won forward at Won 1260/$.
Cost of Settlement in 6 months = 6, 030M 

1
 $4, 785, 714
1260

(3) Money market hedge
Required investment now (in won) 

6,030M
 Won 5,583,333
(1  8%)

Required dollar amount now  Won5, 583, 333 

1
= $4,652,778
1200

sh is ar stu ed d v i y re aC s ou o u rc rs e eH w e r as
o.
co m U.S dollar cost in 6 months = $4, 652, 778 