Case 3 Hintz-Kessels-Kohl A.G.
If we assume that the $/As rate does not change the Costa Rica contract is made to appear not very attractive. The trend in the US dollar has been such that it has been appreciating. If the dollar continues its climb then revenues received in US dollars will increase.
In the case of a depreciating dollar, this would obviously make the Costa Rican contract even less appealing. If the US dollar depreciates year on year then the revenues will be less if we convert it back to Schilling.
At this stage given the rising value of the dollar, hedging would in fact make HKK worse off. If HKK were to lock in a forward rate now, it would automatically set the company up for losses. The rates in the forward market are significantly lower than the current exchange rate. The reason for that is, that the interest rates in the US are higher than in Austria. Consequently the US Dollar has to depreciate in the forward market to meet the no-arbitrage condition.
Unless this manufacturing company estimates the dollar to drop significantly in the future, hedging in this instance is going to make HKK even worse off. And if the Dollar appreciates, we cannot take advantage of that, since we have already looked in the forward exchange rate.
If we assume no OKB financing we are using the risk free rate of 13.75%. This consists of the Austrian schilling borrowing costs of 12.75% plus the 1% spread.
In this instance with no exchange rate risk, we get a Net Present Value (NPV) of -23.26. The discounted cash flows decrease every year, once we take into consideration after tax cash flows and the WACC. We calculated this WACC to be 14.75%.
The total amount to be received by HKK in the Costa Rica contract is As300 millio ...