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Harmony of Manhattan, New York, is building a new factory in Malaysia. In three months, the company has to pay RM 30,000,000. The currency is Malaysian Ringgit. Harmony's weighted average cost of capital is 15%. The foreign exchange and interest quotations are the following: Construction payment due in three months (A/P, Ringgit) 30,000,000 Present spot rate (RM/$) 4.0000 Three-month forward rate (RM/S) 4.2000 Malaysian three-month interest rate (per annum) 8.000% U.S. dollar three-month interest rate (per annum) 4.000% Harmony's weighted average cost of capital (WACC) 15.000% Harmony's treasury manager, concerned about the exchange rate fluctuations, contemplates hedging its foreign exchange risk. The manager's own forecast is as follows: Expected spot rate in three-months (RM/S): Highest expected rate (reflecting a significant devaluation) 4.8000 Expected rate 4.5000 Lowest expected rate (reflecting a strengthening of the RM) 3.8000 1. What realistic alternatives are available to Harmony for making payments? 2. Which method would you select ar why?
Sagot :
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