Hedging: Tamcon Industries Has Purchased Equipment from a Brazilian Company

question 64

Multiple Choice

Hedging: Tamcon Industries has purchased equipment from a Brazilian company for a total cost of 1,272,500 Brazilian reals (BR) . The company has to pay in 30 days. Citicorp has given the company a 30-day forward quote of $0.6123/real. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? Round to the nearest dollar.

• A) $24,687
• B) $803,838
• C) $779,152
• D) $31,278

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Definitions:

CDs

Short for Certificates of Deposit, which are savings certificates with a fixed maturity date and specified fixed interest rate that are issued by banks.

Budget Constraint

A budget constraint represents the limitations on the spending choices of consumers based on their income and the prices of goods and services.

DVDs

Digital Versatile Discs, a type of optical storage media used for storing data, including movies, software, and other digital information.

CDs

Compact Discs, a form of digital optical disc data storage, used for storing digital data, including music, software, and data files.