Question: Nikken Microsystems (B). Assume that Nikken Microsystems prefers to receive U.S. dollars rather than euros for the trade transaction described in Problem. It is considering two alternatives:
1) sell the acceptance for euros at once and convert the euros immediately to U.S. dollars at the spot rate of exchange of $1.00/€ or
2) hold the euro acceptance until maturity but at the start sell the expected euro proceeds forward for dollars at the 3-month forward rate of $1.02/€.
a. What are the U.S. dollar net proceeds received at once from the discounted trade acceptance in alternative 1?
b. What are the U.S. dollar net proceeds received in three months in alternative 2?
c. What is the break-even investment rate that would equalize the net U.S. dollar proceeds from both alternatives?
d. Which alternative should Nikken Microsystems choose?
Problem: Nikken Microsystems (A). Assume Nikken Microsystems has sold Internet servers to Telecom España for €700,000. Payment is due in three months and will be made with a trade acceptance from Telecom España Acceptance. The acceptance fee is 1.0% per annum of the face amount of the note. This acceptance will be sold at a 4% per annum discount. What is the annualized percentage all-in cost in euros of this method of trade financing?