A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?

A U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed. a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor. b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 42QA

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Dividend Declared due in Six Months in Sri Lanka Rupee (LKR):LKR 4,350,000 Spot Rate (LKR/US$) 196 Six Forward Rate (LKR/US$) 198 Six Month Option on : Call Option Put Option Strike Rate (LKR/$) 204 204 Premium, Percent Per Year 3.5 % 5.5 % U.S. Exporter’s Weighted Average Cost of Capital (WACC) 9% U.S. investor will receive dividend from a Sri Lankan coconut exporting company but worries about the depreciation of the Sri Lankan Rupee in six months due to the expectation in the interest rate rises by the Fed.a. Calculate hedging alternatives (1. Do Nothing (use spot and forward rates), 2. Forward Sale and 3. Options) and evaluate which alternative best suits to the U.S. investor.b. Keeping option premium fixed, what is the strike rate at which both options hedge and forward hedge yields are equal to each other?
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