Maria Gonzalez and Ganado. Ganado—the ​U.S.-based company discussed in this chapter—has concluded another large sale of telecommunications equipment to Regency​ (U.K.). Total payment of ​£3,000,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14.653​% per annum​ (due to credit concerns of the British​ banks). Given the exchange rates and interest rates in the popup​ window, compare alternate ways below that Ganado might hedge its foreign exchange transaction exposure. Assume a​ 360-day financial year.
Assumption
Value
​ 90-day A/R in pounds
£3,000,000
Spot rate
​($/£​)
​$1.7649
​ 90-day forward rate
​($/£​)
​$1.7514
​ 3-month U.S. dollar investment rate
6.134​%
​ 3-month U.S. dollar borrowing rate
8.613​%
​ 3-month U.K. investment interest rate
8.652​%
​ 3-month U.K. borrowing interest rate
14.653​%
​ Ganado's WACC
12.729​%
Expected spot rate in 90 days
​($/£​)
​$1.7875
Put options on the British​ pound:
Strike rate
​($/£​)
​$1.7500
Put option premium
1.5​%
Strike rate
​($/£​)
​$1.7200
Put option premium
1.0​%
Click on the icon located on the​ top-right corner of the data table in order to copy its contents into a spreadsheet.
a. How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the current spot rate of ​$1.7649​/£​? The​ 90-day forward rate of ​$1.7514​/£​? The expected spot rate of ​$1.7875​/£​?
b. How much in U.S. dollars will Ganado receive in 90 days with a forward market​ hedge?
c. How much in U.S. dollars will Ganado receive in 90 days with a money market​ hedge? d. How much in U.S. dollars will Ganado receive in 90 days with an option market​ hedge?
e. What transaction exposure hedge is now in​ Ganado's best​ interest?