Question

Bradley Machine Corp. expects to need​ S$500,000 (Singapore​ dollars) for an accounts payable in one year. The current spot rate of the Singapore dollar is​ $0.60/S$. The one year forward rate of the Singapore dollar is​ $0.62/S$. The spot rate in one year is forecasted to be​ $0.61/S$. The​ firm’s WACC is​ 12% per year.
Assume that one year put options on Singapore dollars are​ available, with an exercise price of​ $0.63/S$ and a premium of​ $0.04/S$. One year call options on Singapore dollars are available with an exercise price of​ $0.60/S$ and a premium of​ $0.03/S$. Assume the following money market​ rates:
                        U.S.      Singapore
Deposit rate       ​ 8%         ​ 5%
Borrowing rate   ​ 9%         ​ 6%
Assume that for money market​ hedges, the firm invests or borrows at the​ short-term deposit rates given above rather than at their WACC. Given this​ information, what would be the total cost in USD to Bradley of the​ S$500,000 if the Money Market Hedge is​ chosen?
A.
​$310,115
B.
​$325,450
C.
​$311,428
D.
​$305,000

Answer 1

BMC has a S$ liability of 500,000. So it has to set up a
an asset which will have a maturity value of
S$500,000 in one year.
So, it has to deposit S$500000/1.05 =	476190	S$
For the required S$476,190, borrowing will be made in $. The borrowing required 476190*0.6 =	$         2,85,714
The amount repayable under the loan will be 285714*1.09 =	$         3,11,428
The above amount will be the net outflow in dollars against the payable.
Answer: [C] $311,428