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Account payable in turkish Lira (TL)
Account payable in turkish Lira (TL). Your recent import from turkey has resulted in a three-month account payable in the amount of TL14.5million. You would like to examine a few hedging strategies. The following information is available. Your borrowing and investment rates in each country are at the same rates.
Spot rate = TL 1.49/$
Three-month forward rate = TL1.62/$
U.S. interest rate = 3.0 percent per year (or 3.0/4% per 3 months)
Turkish interest rate = 8.4 percent per year (or 8.4/4% per 3 months)
WACC of your company = 12.0 percent per year (or 12.0/4% per 3 months)
Cost of an option on TL at the strike price of Tl 1.54/$ = 2.0 percent
Please answer the following question regarding the above case. All answers are in millions.
if you were money market rates, the outcome at the end of the period will be (the company uses its WACC to account for time value of money).
A) $9.817326
B) none of the answers in this question are correct
C) $8.343081
D) $8.312461
Expert Solution
Answer
None of the answers in this question are correct
Answer is described below;
Explanation
Total Account payable = 14.5 million TL
Current spot rate = TL 1.49/ $
3 month Forward rate = TL 1.62/$
If the importer chooses a 3 month forward contract, the $ outflow will be equal to Total Foreign currency Exposure / 3 month forward rate because he is afraid of foreign currency appreciating.
Quotation given is TL/$.
so, to convert to $, we have to divide.
Outcome of using forward rate. = 14.5 million TL / 1.62
= $8.950617 million.
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