# Project #63282 - Finance

Read through section 11-2d, Comparison of Techniques to Hedge Payables, in Chapter 11 of the textbook page 360. Students will submit word document with answers to the questions below. For question one, students need to provide detail step-by-step calculations similar to your example in section 11-2d of your textbook to accompany your answers. Your answer to question 2 should be no more than 1 to 2 paragraphs. Note, you do not need to provide the calculations for this assignment.

The investment rate that is used in the money market hedge can be substituted with either of the following:

-The cost of debt, if the company uses this loan proceed to pay down its debt instead of investing.

-The cost of capital of the firm, if the company uses this loan proceed to invest in its company’s project.

For these reasons, recalculate the money market hedge using, (instead of the 5% deposit rate it could receive from investing the loan proceed), the new rates provided below:

Cost of debt of 6%

Cost of capital of 9%

1) What is your new value for the money market hedge? Would this affect your initial decision from reading through section 11-2d? Discuss the drawbacks from using different hedging technique.

2) Consider the limitations of using the loan proceed either for debt payment or firm’s investment in the money market hedge.

More Instructions to better understand:

1) On this template, you only need to change the yellow highlighted cells, on sheet "AP 11d", to match the 2 scenarios asked in the question 1. Then, you can submit the answers with your analysis on each scenario on decision to choose the hedging techniques. Moreover, what do you think are the limitations to using either forwards, options, or money market.
2) For answering # 2, you need to provide your analysis on the limitations of using either the loan proceed for debt payment or for the firm’s investment. This is for the money market hedge only.

 Subject Mathematics Due By (Pacific Time) 03/22/2015 02:00 pm
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