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Lucky 13 Jeans of San Antonio Texas is completing a new assembly plant near Guatemala City A final construction payment of Q8400000 is due in six months Q is the symbol for Guatemalan quetzal

Lucky 13 Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q8,400,000 is due in six months. ("Q" is the symbol for Guatemalan quetzals.) Lucky 13 uses 20% per annum as its weighted average cost of capital. Today s foreign exchange and interest rate quotations are as follows: Construction payment due in 6 months (A/P, quetzals)...............8,400,000 Present spot rate (quetzals/$)...............................................7.0000 6-month forward rate (quetzals/$).........................................7.1000 Guatemalan 6-month interest rate (per annum)........................14.000% U.S. dollar 6-month interest rate (per annum)..........................6.000% Lucky 13 s weighted average cost of capital (WACC).............20.000% Lucky 13 s treasury manager, concerned about the Guatemalan economy, wonders if Lucky 13 should be hedging its foreign exchange risk. The manager s own forecast is as follows: Highest expected rate (reflecting a significant devaluation)...........8.0000 Expected rate.................................................................7.3000 Lowest expected rate (reflecting a strengthening of the quetzal).....6.4000 What realistic alternatives are available to Lucky 13 for making payments? Which method would you select and why?

 

Jun 01 2020 Read more Less More

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