IBM has sold an order of computers to a Canadian firm for C$1,000,000. Payment is...
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Finance
- IBM has sold an order of computers to a Canadian firm for C$1,000,000. Payment is due in three months. Although IBM does not usually worry about foreign exchange risk on Canadian sales it would like to explain what alternatives for hedging exist and their costs in order to help price future sales correctly.
The following data are available:
Three-month interest rate fore borrowing or investing U.S. dollars: 9% per year
Three-month interest rate for borrowing or investing Canadian dollars: 12% per year
Spot rate: C$1.2000/$
Three-month forward rate: C$1.2100/$
Three-month options from Citibank: Put options on C$1000,000 at exercise price of C$1.2000, and a 3% premium
- What are the costs of each alternatives? What are the advantages of each?
- What is the break-even investment rate when comparing forward and money market alternatives? Show your calculations.
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