Question

Question 24 Hot Kustoms Company estimates that with 30% probability it will have to pay a...

Question 24 Hot Kustoms Company estimates that with 30% probability it will have to pay a supplier 10000 Hong Kong dollars in three months. How can Hot Kustoms best hedge this exposure? Explain. Would your answer change if Hot Kustoms had to pay the supplier with 100% certainty? Why or why not?

Homework Answers

Answer #1

1.
As the payment is not certain, buy call option on Hong Kong dollars. This is because the hedge should provide gains when Hong Kong dollar appreciates, as that is the key risk. We buy calls because we will have the right but not the obligation. So we will only exercise when the payment has to be compulsorily made and also it is advantageous for us to do so.

2.
As the payment is certain, buy currency forwards on Hong Kong dollars. This is because the hedge should provide gains when Hong Kong dollar appreciates, as that is the key risk. We buy forwards because the payment is certain and in this case if we use calls we would be unnecessarily paying call premiums.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Hot Kustoms Company estimates that with 30% probability it will have to pay a supplier 10000...
Hot Kustoms Company estimates that with 30% probability it will have to pay a supplier 10000 Hong Kong dollars in three months. How can Hot Kustoms best hedge this exposure? Explain. Would your answer change if Hot Kustoms had to pay the supplier with 100% certainty? Why or why not?
Hot Kustoms Company estimates that with 30% probability it will have to pay a supplier 10000...
Hot Kustoms Company estimates that with 30% probability it will have to pay a supplier 10000 Hong Kong dollars in three months. How can Hot Kustoms best hedge this exposure? Explain. Would your answer change if Hot Kustoms had to pay the supplier with 100% certainty? Why or why not?
QUESTION 3 3) A mining company in Australia has entered into a contract to export iron...
QUESTION 3 3) A mining company in Australia has entered into a contract to export iron ore into China with delivery in three months’ time. The contract is denominated in Chinese Yuan, CNY and is valued at CNY 500 million. The current spot exchange rate is AUD/CNY 5.18. Assume that the expected spot rate in three months’ time is AUD/CNY 5.13. The three-month futures contract for Australian dollar and Chinese Yuan is trading at AUD/CNY 5.09. Should the mining company...
The internal auditor of Apex Company estimates the probability of its internal control procedure being in...
The internal auditor of Apex Company estimates the probability of its internal control procedure being in control to be 80%. She estimates the cost to conduct an investigation to find areas for improvement to be about $28,000 and the cost to revise and improve the internal control procedure to be approximately $67,000. The present value of savings from having the new procedure is expected to be $202,000. 3. What is the expected value of perfect information? Note: The expected value...
1. Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic...
1. Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won950/$, and the 6-month forward rate is Won975/$. The six-month Korean won interest rate is 8% per annum, the six-month US dollar rate is 6% per annum. Bobcat can invest at...
Group Assignment: 1.Why is your knowledge of Risk appetite and Risk threshold important in your Risk...
Group Assignment: 1.Why is your knowledge of Risk appetite and Risk threshold important in your Risk response strategy? 2.You had planned in your risk response to engage two additional programmers during the implementation stage of your project. Suddenly you realized that you may need a total of three. What are three possible things that you must do to ensure that the project is not delayed? 3.You are the project manager of a software development company. Your company receives supplies of...
.Why is your knowledge of Risk appetite and Risk threshold important in your Risk response strategy?...
.Why is your knowledge of Risk appetite and Risk threshold important in your Risk response strategy? 2.You had planned in your risk response to engage two additional programmers during the implementation stage of your project. Suddenly you realized that you may need a total of three. What are three possible things that you must do to ensure that the project is not delayed? 3.You are the project manager of a software development company. Your company receives supplies of chips from...
China Moves to Tighten the Money Supply By DAVID BARBOZA – January 6, 2007 China’s central...
China Moves to Tighten the Money Supply By DAVID BARBOZA – January 6, 2007 China’s central bank said late Friday that it had raised the reserve requirement ratio for banks, the fourth increase in six months, to further tighten the nation’s money supply. The modest move, which takes effect this month, increases the reserve ratio by half a percentage point, to 9.5 percent. Analysts said it was the government’s latest warning that too much money in the financial system could...
Question 21 Suppose a health insurance company is interested in carrying out an investigation as to...
Question 21 Suppose a health insurance company is interested in carrying out an investigation as to the annual expenditures per household on their healthcare costs. In order to most accurately report their figures, the company decides to ensure “virtual certainty” about their estimates by using a Z value of 3.0 for their calculations. The company conducts a SRS of 843 households and determines the sample average household expenditures on healthcare is $43,257.00. A) Assume the company uses a σ=$879.00. Calculate...
INTRO NewForm IT is a seven-year-old IT consulting company founded in 2012 that provides services to...
INTRO NewForm IT is a seven-year-old IT consulting company founded in 2012 that provides services to small businesses in their local and regional area. NewForm employs 83 people, 61 of whom are IT professionals/ consultants. NewForm is struggling financially; it has not met its revenue projections in the last five quarters. NewForm has suffered excessive leadership turnover in the past three years. The original founders sold NewForm in 2015; one of them, James Stanton, remained on as CHRO but sold...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT