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8/9/2019 Pbm10.10
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Problem 10.10 Pupule Travel
Spot rate (T$/$) 33.40
3-month forward rate (T$/$) 32.40
3-month Taiwan dollar deposit rate 1.500%
3-month dollar orrowin! rate ".500%
3-month #all option on T$ not aailale
Assumptions Values
#&'isition pri#e 3-month /* +ewTaiwan dollars (T$) 7,000,000
Spot rate (T$/$) 33.40
3-month forward rate (T$/$) 32.40
3-month Taiwan dollar deposit rate 1.500%
3-month dollar borrowing rate 6.500%
3-month call option on T$ not available
Thomas ,arsons #redit line with an of awaii $ 200,000
valuation o! Alternatives "ost "ertaint#
1. o ot&in' (( )ait 3 mont&s an* bu# T$ spot
If spot rate is the same as current spot rate $ 20+,50.4 -is#
If spot rate is the same as 3-month forward rate $ 216,04+.3 -is#
Although this would do nothing to cover the currenc ris!"
there would be no re#uired pament or borrowing for 3 -months
2. /u# T$ !orar* 3(mont&s
Assured cost of T$ at 3-month forward rate $ 216,04+.3 "ertain
'p'le Trael* a onol'l'* awaii ased 100% priatel owned trael #ompan has si!ned an a!reement to a#&'ire a50% ownership share of Tai#h'n! Trael* a Taiwan ased priatel owned trael a!en# spe#ialiin! in seri#in!ino'nd #'stomers from the nited States and ,anada. The a#&'isition pri#e is million Taiwan dollars (T$ *000*000)
paale in #ash in 3 months.
Thomas ,arson* 'p'le Trael6s owner* eliees the Taiwan dollar will either remain stale or de#line a little oer thene7t 3 months. t the present spot rate of T$35/$* the amo'nt of #ash re&'ired is onl $200*000 't een this relatielmodest amo'nt will need to e orrowed personall Thomas ,arson. Taiwanese interest-earin! deposits non-residents are re!'lated the !oernment* and are #'rrentl set at 1.5% per ear. e has a #redit line with an ofawaii for $200*000 with a #'rrent orrowin! interest rate of 8% per ear. e does not eliee that he #an #al#'late a#redile wei!hted aera!e #ost of #apital sin#e he has no sto# o'tstandin! and his #ompetitors are all also priatel-owned witho't dis#los're of their finan#ial res'lts. Sin#e the a#&'isition wo'ld 'se 'p all his aailale #redit* hewonders if he sho'ld hed!e this transa#tion e7pos're. e has &'otes from an of awaii shown in the tale elow.
nale the #osts and riss of ea#h alternatie* and then mae a re#ommendation as to whi#h alternatie Thomas,arson sho'ld #hoose.
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