Question

# Bradley Machine Corp. expects to need​ S\$500,000 (Singapore​ dollars) for an accounts payable in one year....

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

 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

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