Determine expected rate, Cost Accounting

Bebe, a manufacturer of sophisticated and fashionable women's clothing, is completing a new assembly plant in Malaysia.  A final construction payment of 6,000,000 MYR (Malaysian Ringgit) is due in six months.  Bebe uses a 10% annual rate for its weighted average cost of capital. Today's foreign exchange and interest rate quotations are:

Present spot rate            MYR 3.3000/USD

Six-month forward rate       MYR 3.2000/USD

Malaysian interest rate      3% per annum

US dollar interest rate           6% per annum

Bebe's treasury manager, concerned about the Malaysian economy, wonders whether Bebe should be hedging its foreign exchange risk.  The manager's own forecast is as follows:

Expected rate (in 6 months or 180 days):

Highest            MYR 3.5000/USD

Expected           MYR 3.2500/USD

Lowest                  MYR 3.0000/USD

What realistic alternatives are available to Bebe for making payment?  Which method would you select and why?

Posted Date: 2/23/2013 4:20:46 AM | Location : United States

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