Consider a US firm sells a gas turbine generator to a British firm; in March 201x for British pound BP 1,000,000. Payment is due
three months later in June 201x. The firm’s cost of capital is 12%. The following quotes are current in the market:1. spot rate: $1.764 per British pound2. 3-month forward rate: $1.754 per British pound3. 3-month interest rate for borrowing in U.K.: 2.5% Per quarter4. UK 3-month investment rate: 2.0% /quarter5. US 3-month borrowing rate: 2.0% /quarter6. US 3-month investment rate: 1.5% per quarter7. June put option in the over the counter market for British pound 1,000,000; strike price $1.71 (out-of-the money): 1% premium8. June put option on the Philadelphia Stock Exchange: a. British pound BP 31,250 per contract at strike price of $1.75 costb. 2.5 cents per pound premium, and brokerage cost $50 per contract9. the firm’s foreign exchange advisory service forecasts that the spot rate in three months will be $1.76 per pound.Show all your calculations of cost of the following alternatives:(i) Unhedged Position; (ii) Money Market Hedge; (iii) Forward market hedge; and (iv) Options Hedge;(Show your work. This means that No work is No credits)
1 answer:
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Answer:
1. Technical improvements cause production costs to decline, which causes supply to increase and prices to decrease.
2. Decreased unemployment causes consumer incomes to increase which causes demand to increase and hence price to increase.
Explanation:
Demand refers to a consumer's desire to purchase a particular good or service at a given time for a specific price. Supply on the other hand, is the willingness of a producer to produce a particular good or service at a given time for specific price.
1. Production cost is a factor that influences supply. For example, cost of labor or raw material cost. When production costs fall, more products can be produced at a lesser cost. Hence'
- The supply curve shifts right from S1 to S2.
- This causes quantity supplied to increase from QS1 to QS2
- And price to fall from P2 to P1. Please refer Diagram 1 in attachment.
2. When unemployment decreases, it means that more people are working in the economy and hence their incomes are also higher. This means there is a higher purchasing power and also higher demand for products. Hence,
- The demand curve shifts from D1 to D2.
- This causes quantity demanded to increase from QD1 to QD2
- And price to increase from P1 to P2. Please refer Diagram 2 in attachment.
