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SpooksUnd
December 26th 2006, 04:08 PM
Good Day Everyone,

Happy Holidays to you all.

I would be most grateful to get a feedback, in terms of solution to the question i'll be including in this mail. It is Investment Risks related.

Question: Dunna Homes Deutschland.
Prefabricated log cabins from Germany are very popular with homebuilders in the mountains of Western United States. A Flagstaff developer has just ordered such a cabin for a client. The terms of agreement are such that Dunna Homes, the manufacturer in Germany, drew a three month draft against letter of credit issued by Wells Fargo Bank, LA, on behalf of the developer in the amount of $4,000,000. After the cabin was shipped and all documentation completed, Dunna Homes presented a draft to its local bank, Deutsche, forwarding to LA, where Wells Fargo Bank stamped it "Accepted, payable in three months from today", dated the stamp December 14 and returned it to Dunna Homes.
Dunna Homes has no immediate cah need but wants the funds in about three months to finance a seasonal expansion of its production line. Dunna Homes does not want to expose itself to any exchange rate risk. What should Dunna Homes do?

MARKET DATA
Dollar-Euro:
Spot rate 1.3151
One month 1.3170
3 months 1.3206
One year 1.3327
Currency futures* *Futures: Euro125,000
$-Euro Dec 1.3147
$-Euro March 1.3198
Options Euro/$* *Options: $100,0001.3000 Dec Call 2.24
1.3000 March Call 3.65
1.3250 Dec Call 0.80
1.3250 March Call 2.29

Market Rates
US$ Libor
One month 5.32000
3 months 5.37000
US$ CD, three months 5.29

Euro Libor
One month 3.49425
3 months 3.62700
Euro CD, three months 3.61
Euro Prime Rate 3.25
Discount Rate Prime Rate + 1%

I would be most obliged to get feedback.
Thank you very much in anticipation.

Regards