End-of-Chapter Question Solutions

1.“Rule number one: If someone disrespects you, you send a message so fierce that they won't have the chance to do it again.”

Along with Auguste Comte, another influential philosopher and scientist was Charles Darwin. Darwin presented the idea of natural selection and evolution in the 19th century. Darwin said that variations within a specific species will kill off the weaker members will die off and the stronger members will survive, based on Malthus' theory that population will always outgrow the amount of supplies.

In Kurt Lewin’s formula:  B = f(P,E), P stands for ___ and E stands for ___.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

These options contracts have a total premium of $46,200. In order to break even on this contract the British pound would need to depreciate to a level of $1.406/£. Any rate above this would result in a loss of the premium. An appreciation of the British pound (to less than $1.406/£) would net a profit on the sale of the options.

Explicit costs: $37,000 (= $12,000 for the helper + $5,000 of rent + $20,000 of materials). Implicit costs: $22,000 (= $4,000 of forgone interest + $15,000 of forgone salary + $3,000 of entrepreneurship).

16. Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective.

a. Design the logic for a program that allows a user to enter 10 numbers, then

Hours: Managers are required to work five days a week including either Saturday or Sunday. Hours may vary.

The two principal reasons for holding cash are for transac¬tions and compensating balances. The target cash balance is not equal to the sum of the holdings for each reason because the same money can often partially satisfy both motives.

4. An American option can be exercised at any time during its life. : True

Interest rate swaps include the exchange of interest payments, while currency swaps include the exchange of the same amount of cash in one currency. Interest rate swaps are financial derivative contracts where both parties agree to exchange interest rate cash flows

Scout Finch is the Chief Financial Officer [CFO] of Dayton Manufacturing, a U.S. based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm for One million pounds. This single sale is quite large in relation to Dayton’s present business. Dayton has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in March with payment due three months later in June. Scout Finch has collected the following financial market information for the analysis of her currency exposure problem:           Spot Exchange rate: $1.7640 per British pound.

Secondly, currency forward contracts can be generated in required currency while using future has limited range of currencies, as US Dollar/Pound Sterling, US Dollar/Yen and US Dollar/Euro. This means forwards have more variation of currency rather than futures (ibid, P.621-P.622). Lastly, The amount of each future contract is fixed (ibid, P.622). For example, “US Dollar/Pound Sterling contracts are for £25,000 each” (ibid). Forward contracts are more suitable for global corporations. These three reasons cannot be overstated as there is no limitation in currency forward contracts. In other words, forward contracts are more flexible than counterparts.

The sum of the factors is 4.02. Norming each of the factors by multiplying by 4/4.02  =  .995 gives the final factors as: