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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?
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