# 3- abc paris bid: you have been asked by abc to help determine a

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3- ABC Paris Bid:

You have been asked by ABC to help determine a bid for installation of a large Projector production facility in Paris Franc. The bid, which consists of all Costs and Profit had to be specified entirely in term of Euro and is to be submitted on June 20, 2012. The client will announce the awarding decision on July 20 and the Euro payment will be received in 90 days (October 20).

ABC expects the projects to cost \$1,000,000 in the U.S., £100,000 British pound for importing material from England and an addition 250,000 Euro in Paris. Actual payments for all costs need only be made on October 20. ABC will charge a 10% Profit Margin Markup on all its costs.

The following information on June 20, 2012 is to be used in answering the following questions.

U.S. 90-120 days borrowing rate = 8%
U.S. 90-120 days deposit rate = 7%
Euro 90-120 days borrowing rate = 6.5%
Euro 90-120 days deposit rate = 5.5%
Pound 90-120 days borrowing rate = 9%
Pound 90-120 days deposit rate = 8.5%
Pound spot quote = £.58/\$
Pound 3-4 month Forward quote = \$1.50/£
Euro spot quote = €0.82/\$
Euro 3-4 month Forward quote = \$1.10/€

Options strike price Call Put

3-4 month \$1.05/€ \$.015/€ \$.012/€
3-4 month \$1.45/£ \$.025/£ \$.02/£

Options contracts are over the counter and can be purchase for any size. Assume the transaction costs for options and forward contracts are zero.

Your task is to construct the appropriate hedges and recommend of a Euro amount to place as the bid that would guarantee the required 25% profit margin.

1. How much of the revenue is exposed?
2. What is the amount of bid using Borrowing and Lending?
3. What is the amount of bid using Forward contract?

For Extra Credit answer the following question:

What is the amount of bid using Options contract?

Present your suggestions clearly and make sure you describe the outcomes under all the contingencies.

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