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FIN4802 Assignment 1 Semester 1 ANSWERS 2026 - Due 21 May 2026

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FIN4802 Assignment 1 Semester 1 2026 - Due 21 May 2026 FIN4802 Assignment 01 Due date 21 May 2026 Unique number 662810 Please study chapters 1 to 14 of the prescribed textbook (6th edition), as well as the relevant learning units/ lessons intensively, to prepare for assignment 01. QUESTION 1 10 marks 1. Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1 year. The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on Euros are available, with an exercise price of $1.23 and a premium of $0.04 per unit. Assume the following money market rates: United States Eurozone Deposit Rate 8% 5% Borrowing Rate 9% 6% (a) Determine the dollar cash flows to be received if Jones uses a money market hedge. (Assume Jones does not have any cash on hand) (5) (b) Determine the dollar cash flows to be received if Jones uses a put option hedge. (5)

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Institution
University Of South Africa (Unisa)
Course
Taxation of Business Activities (FIN4802)

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FIN4802 ASSIGNMENT 1 2026


DUE 21 MAY 2026


QUESTION 1


1. Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1 year.
The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on
Euros are available, with an exercise price of $1.23 and a premium of $0.04 per unit.
Assume the following money market rates:




(a) Determine the dollar cash flows to be received if Jones uses a money market
hedge (Assume Jones does not have any cash on hand)

Receivable: €1,000,000 in 1 year.
Money market rates: Eurozone borrowing = 6%; US deposit = 8%.
Spot rate: $1.20/€.

Present value of the receivable in euros

PV€ = 1,000,0001+0.06 = 1,000,0001.06 = €943,396.23PV€ = 1+0.061,000,000
=1.061,000,000 = €943,396.23

Convert euros to dollars at spot rate

$proceeds= 943,396.23×1.20=$1,132,075.48$proceeds=943,396.23×1.20 =
$1,132,075.48

Invest dollars at US deposit rate (8%)
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Institution
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Taxation of Business Activities (FIN4802)

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