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Good afternoon
in example 3, the last line of the answer is
WACC for B = (100/140 x 22.29%) + (40/140 x 7%) = 17.92%
where kd=7%.
shouldnt the 2nd term be: 40/140 x 7 x (1-0.25)?
regards
A UK company owes a US supplier $1,000,000 payable in April.
The spot rate is $/£ 1.4850 – 1.4870 and the UK company is concerned that the $ might strengthen.
Traded options are available at prices as shown in the following table:
$/£ Options £31,250 (cents per £1)
Calls Puts
Strike price Mar Apr May Mar Apr May
1.425 6.29 6.32 6.49 0.02 0.14 0.45
1.450 3.81 4.17 4.54 0.03 0.48 0.98
1.475 1.53 2.45 2.92 0.13 1.20 1.84
(a) Show how traded $/£ currency options can be used to hedge the risk at 1.475.Sir this was in one of ur lectures… what doubt me was when u were calculating the premium you used 1.4850 rather than 1.4870.since the premium is a payment i think we should used the higher spot rate of 1.4870?
Mansoor:
Good afternoon you as well 🙂
No. The cost of debt it automatically after tax relief, unless you are specifically told that it is before tax.
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