Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials that are used in a variety of pigment applications in many industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for 6,800,000dirhams, payable in six months.
Six-month call options on 6,800,000 dirhams at an exercise price of 11.20 dirhams per dollar are available from BankAl-Maghrub at a premium of 1.9%. Six-month put options on 6,800,000 dirhams at an exercise price of 11.20 dirhams per dollar are available at a premium of 3.2%., compare alternate ways below that Micca might hedge its foreign exchange transaction exposure.
a. How much in U.S. dollars will Micca pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be 11.20 dirhams per dollar? 11.70 dirhams per dollar?
b. How much in U.S. dollars will Micca pay in 6 months with a forward market hedge?
c. How much in U.S. dollars will Micca pay in 6 months with a money market hedge?
d. How much in U.S. dollars will Micca pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than
11.20 dirhams per dollar?
e. What is your recommendation? Assumptions
Values
Shipment of phosphates from Morocco, Moroccan dirhams
6,800,000
Micca's cost of capital (WACC)
16.50%
Spot exchange rate, dirhams/$
11.20
6-month forward rate, dirhams/$
11.70
6-month interest rate for borrowing, Morocco (per annum)
11.00%
6-month interest rate for investing, Morocco (per annum)
10.00%
6-month interest rate for borrowing, U.S. (per annum)
9.00%
6-month interest rate for investing, U.S. (per annum)
8.00%
