FIN4802 Assignment 1 (QUALITY ANSWERS) 2026

This document provides detailed workings, clear explanations, and well-structured solutions for the FIN4802 Assignment 1 (QUALITY ANSWERS) 2026 - For assistance call or Whats-App us on 0.8.1..2.7.8..3.3.7.2.... 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) QUESTION 2 10 marks (a) A call option allows the holder to buy USD100 000 at an exercise exchange rate of 1.8000 (AUD/USD). If the premium paid is 0.5 Australian cents per USD, calculate the net payoff at the following spot exchange rates: i. 1.8040 AUD/USD (4) i. 1.8260 AUD/USD (4) ii. 1.7870 AUD/USD (3) Powered by CamScanner iv. Atwhat exchange rate will the holder break even? (4) (b) A put option allows the holder to sell NOK250 000 at an exercise exchange rate of 0.190 (AUD/NOK). If the premium paid is 0.4 Australian cents per NOK, calculate the net payoff at the following spot exchange rates: i. 0.200 AUD/NOK (3) li. 0.192 AUD/NOK (1) li. 0.180 AUD/NOK (3) iv. Atwhat exchange rate will the holder break even? (3) QUESTION 3 30 marks StellaR Trading LLC, a United Arab Emirates (UAE) multinational enterprise, is contemplating undertaking foreign capital expenditure in South Africa. The initial cost of the project is ZAR10 000 000. The annual cash flows over the project's five-year economic life, in ZAR, are estimated at R, R, R, R6 000 OOD, and R7 000 000, respectively. The parent firm’s cost of capital in the UAE Dirham (AED) is 9.5 percent. Long-run inflation is forecast to be 3 percent per annum in the UAE, and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/AED = 3.75. Determine the NPV for the project in AED by: (a) Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher Effect and then converting to AED at the current spot rate. (10) (6b) Converting all cash flows from ZAR to AED at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the AED cost of capital. (12) (c) What is the NPV in AED if the actual pattern of ZAR/AED exchange rates is: S(0) = 3.75; S(1) = 5.7; S(2) = 6.7; S(3) = 7.2; S(4) = 7.7; and S(5) = 8.2? (8)