Money, Banking, and International Financeݐ݊ݑ݉ܽ($)= 3 ݈݈݊݅݅݉ ݑݏ݀݊൭$1.^750 ൗ 1 ݀݊ݑ൱=$5. 25 ݈݈݊݅݅݉ (5)
Strategy 4: Trident could borrow from a British bank. This strategy is more involved and
entails no exchange rate risk. First, Trident borrows 2.899 million pounds today, calculated in
Equation 6. Accordingly, the British bank charges 14% interest and Trident will owe the bank 3
million pounds in 90 days. Consequently, we use the present value formula to calculate the
present value that grows into the amount the British company will pay in 90 days.
ݏ݀݊ݑ݂ ݐ ݓݎݎܾ(£)=
௨௧௨ ௩௨
ଵାయలబ
=
ଷ ௨ௗ௦
ଵା.ଵସయలబవబ =^2.^899 ݈݈݊݅݅݉^ ݏ݀݊ݑ^ (6)^
Then Trident immediately transfers the bank loan in U.S. dollars today using the spot
exchange rate. Consequently, Trident receives $5.10 7 million today. Once the British company
pays its accounts receivable, subsequently, Trident repays the British bank loan. This transaction
differs from the first three strategies because Trident receives funds today for an accounts
receivable that the British company pays in 90 days. Although Strategy 4 yields the lowest
amount, Trident receives money today that it could invest and earn interest while Trident would
wait 90 days until receiving money for the first three strategies.
ݐ݊ݑ݉ܽ($)= 2. 899 ݈݈݊݅݅݉ ݏ݀݊ݑ൭$1.^762 ൗ 1 ݀݊ݑ൱=$5. 107 ݈݈݊݅݅݉ (7)
A company could use various strategies to reduce the exchange rate risk. For example, the
U.S. company, Caterpillar, bought a South Korean company for 6,030 million wons, due in 6
months. In this case, Caterpillar has an accounts payable. A specialist at Caterpillar observes the
following strategies:
- Caterpillar could use the spot exchange, 1,200 wons per $ 1.
- Caterpillar could enter a 180 - day forward contract with the exchange rate set at 1,260 wons /
$ 1. - Caterpillar could buy a 180-day call option for wons with a strike price of $1 / 1,200 wons
and a premium of 3%. - Caterpillar could deposit funds into a Korean bank and earn interest for 180 days. The
Korean interest rate is 16% APR.
Strategy 1: Caterpillar decides to do nothing and pay its obligation using the spot exchange
rate in six months. Unfortunately, this strategy comes with an exchange rate risk. If the Korean