Premium Essay

Baker

In: Business and Management

Submitted By mssassy50
Words 341
Pages 2
2. Assuming Baker agrees to the new Novo sale, determine the present value of the expected future cash inflow assuming: (1) there is no hedge, (2) the company hedges using a forward contract, and (3) the company hedges using the money market.

No hedge:

Present Value:
86.23 * 1815= BRL 156,362.25
BRL 156,362.25 * .4368= $68,299.03

Future Value:
BRL 156,362.25 * .4234= $66,203.78

Hedge using forward contract:

Present Value:
66,094.32 / (1 + .0215)= $64,703.20

Future Value:
BRL 156,362.25 * .4227= $66,094.32

Hedge using money market:

Present Value:
BRL 156,362.25 / (1 + .065)= BRL 146,819.01

BRL 146,819.01 * .4368)= $64,130.54

3. Are the money markets and forward markets in parity?

The above data shows the calculations for the present value of the expected future cash inflow assuming there is no hedge, the company hedges using a forward contract, and the company hedges using the money market. These calculations are done using the current price per gallon of adhesives at 86.23 in Brazilian Real. As you will see below we take into account the change in material cost and find the new price per gallon of the adhesive. This turns out to be 88.39 and we go on to calculate the new present value of the expected future cash inflow assuming there is no hedge, the company hedges using a forward contract, and the company hedges using the money market. The data below shows that the money markets and forward markets are not in parity. We come to this conclusion by looking at the different interest rates. The difference between the discount rates of 6.5% used to arrive at the PV of the money market loan and 5.08% used to arrive at the PV of the anticipated future inflow of BRL from the sale to Novo converted at a forward rate of 0.4227 are the reason why the money markets and forward markets are not in

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