Pfizer, an American corporation, just signed a contract to sell laboratory equipment for COVID -19 research to Bayer AG- a German corporation. Bayer AG will be billed €10 million, which is receivable in 3 months. The current spot exchange rate is $1.1290/€ and the 3-month forward rate is $1.1945/€. The U.S. annual deposit rate is 4.0% and annual U.S. borrowing rate is 8%. The annual borrowing rate at the Dresden Bank (Germany) is 8.0%. Pfizer’s cost of capital is 10% per annum. Put options on Euro are available at strike rate of $1.1960/€ and premium of 1.0%. Call options on Euro are available at strike rate of $1.1970/€ and premium of 1.5%. Pfizer is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. Outline how you would deal with transaction exposure. Calculate and discuss different hedging alternatives. Which alternative would you recommend? Why?

Pfizer, an American corporation, just signed a contract to sell laboratory equipment for COVID -19 research to Bayer AG- a German corporation. Bayer AG will be billed €10 million, which is receivable in 3 months. The current spot exchange rate is $1.1290/€ and the 3-month forward rate is $1.1945/€. The U.S. annual deposit rate is 4.0% and annual U.S. borrowing rate is 8%. The annual borrowing rate at the Dresden Bank (Germany) is 8.0%. Pfizer’s cost of capital is 10% per annum. Put options on Euro are available at strike rate of $1.1960/€ and premium of 1.0%. Call options on Euro are available at strike rate of $1.1970/€ and premium of 1.5%. Pfizer is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. Outline how you would deal with transaction exposure. Calculate and discuss different hedging alternatives. Which alternative would you recommend? Why?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

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