Question

On 1st March. 2008, A Inc, a US company bought certain products from Tapland. The currency of Tapland is Tapa. The price agreed was Tapa 900000 payable on 31st May, 2008. The spot price on 1st March, 2008 was 10 Tapa per US $. The expected future spot rate was 8 Tapa per US $: and the 3-months forward rate is 9 Tapa per US$. The US and Tapland annual interest rate are 12% and 8% respectively. The tax rate for both countries is 40%. A Inc., is considering three alternatives to deal with the risk of exchange rate fluctuations. i. To enter the forward market to buy Tapa 9,00,000 a 3 months forward rate ii. To borrow appropriate amount in $ to buy Tapa at current spot rate and to invest the Tapa purchased for 3 months iii. To wait until May 31, 2008, and buy Tapas at whatever spot rate prevailing at that time. Which alternative the A Inc. should follow in order to minimize its cost of future payment of Tapas.

          On 1st March. 2008, A Inc, a US company bought certain products from Tapland. The
currency of Tapland is Tapa. The price agreed was Tapa 900000 payable on 31st May,
2008.
The spot price on 1st March, 2008 was 10 Tapa per US $. The expected future spot
rate was 8 Tapa per US $: and the 3-months forward rate is 9 Tapa per US$. The US
and Tapland annual interest rate are 12% and 8% respectively. The tax rate for both
countries is 40%. A Inc., is considering three alternatives to deal with the risk of
exchange rate fluctuations.
i. To enter the forward market to buy Tapa 9,00,000 a 3 months forward rate
ii. To borrow appropriate amount in $ to buy Tapa at current spot rate and to invest
the Tapa purchased for 3 months
iii. To wait until May 31, 2008, and buy Tapas at whatever spot rate prevailing at that
time.
Which alternative the A Inc. should follow in order to minimize its cost of future
payment of Tapas.

On 1st March. 2008, A Inc, a US company bought certain products from Tapland. The
currency of Tapland is Tapa. The price agreed was Tapa 900000 payable on 31st May,
2008.
The spot price on 1st March, 2008 was 10 Tapa per US . The expected future spot
rate was 8 Tapa per US: and the 3-months forward rate is 9 Tapa per US. The US
and Tapland annual interest rate are 12% and 8% respectively. The tax rate for both
countries is 40%. A Inc., is considering three alternatives to deal with the risk of
exchange rate fluctuations.
i. To enter the forward market to buy Tapa 9,00,000 a 3 months forward rate
ii. To borrow appropriate amount in to buy Tapa at current spot rate and to invest
the Tapa purchased for 3 months
iii. To wait until May 31, 2008, and buy Tapas at whatever spot rate prevailing at that
time.
Which alternative the A Inc. should follow in order to minimize its cost of future
payment of Tapas.

Added by Diego M.

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