Ganado, the US-based company discussed in this chapter, has concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of £3,300,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14.795% per annum (due to credit concerns of the British banks). The exchange rates and interest rates are listed as follows:
90-day A/R in pounds 3,300,000
Spot rate ($/pound) 1.7503
90-day forward rate ($/pound) 1.7395
3-month U.S. borrowing interest rate 9.054%
3-month U.K. borrowing interest rate 14.795%
Ganado's WACC 11.906%
Put options on the British pound:
Strike rate ($/pound) 1.7300
Put option premium 1.5%
Compare alternate ways below that Ganado might hedge its foreign exchange transaction exposure (assuming a 360-day financial year):
(1) How much in U.S. dollars will Ganado receive in 90 days without a hedge (a) if the expected spot rate in 90 days is the same as the current spot rate of $1.7503/£? (b) if the expected spot rate in 90 days is $1.7976/£?
(2) How much in U.S. dollars will Ganado receive in 90 days with a forward market hedge?
(3) How much in U.S. dollars will Ganado receive in 90 days with a money market hedge?
(4) How much in U.S. dollars will Ganado receive in 90 days with an option market hedge?
(5) What transaction exposure hedge is in Ganado's best interest?