FINC6013 Workshop 6 Questions & Solutions Chapter 3 PROBLEMS 6. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in connection with a shipment of computer chips that Sony is purchasing from Intel. Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that the dollar will weaken by 1% over the next 90 days, and that the standard deviation of 90-day forecasts of the percentage rate of depreciation of the dollar relative to the yen is 4%. a. Provide a qualitative description of Intel’s transaction exchange risk. Answer: Intel is a U.S. company, and it is scheduled to receive yen in the future. A weakening of the yen versus the dollar causes a given amount of yen to …show more content…
Any weakening of the yen versus the dollar will increase the yen cost of your grain. The possible loss is unbounded. b. Explain two ways to hedge the risk. Answer: You could hedge your risk by buying dollars forward at ¥106.02/$. Alternatively, you could determine the present value of the dollars that you owe and buy that amount of dollars today in the spot market. You could borrow that amount of yen to avoid having to pay today. c. Which of the alternatives in part b is superior? Answer: If you do the forward hedge, you will have to pay ¥106.02/$ [pic]$377,287 = ¥39,999,967.74 in 90 days. If you do the money market hedge, you first need to find the present value of $377,287 at 3.25%. The de-annualized interest rate is (3.25/100) [pic] (90/360) = 0.008125. Thus, the present value is $377,287 / 1.008125 = $374,246.25 Purchasing this amount of dollars in the spot market costs ¥106.35/$ [pic] $374,246.25 = ¥39,801,088.69 To compare this value to the forward hedge, we must take its future value at 1.9375% p.a. The de-annualized interest rate is (1.9375/100) [pic] (90/360) = 0.00484375, and the future value is ¥39,801,088.69 [pic] (1.00484375) = ¥39,993,875.21 The cost of the money market hedge is essentially the same as the cost of the forward hedge because interest rate parity is satisfied. 8. You are a sales manager for Motorola and export
We can calculate the optimal hedge by multiplying the correlation between futures and spot with standard deviation of spot divided by the standard deviation of the future.
26. A financial manager has detrermined that the appropriate rate discount for a foreign project is 17 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively.
What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?
The exchange rates risk that is associated with economic, transaction, and translation exposure in Indian market. From the analysis, anticipate the fluctuations that seem to occur in the next 24 months
15. What is the Present Value (NPV) to Sterling of the base investment using FCF for 2013-2033?
• Jaguar Treasury could create Money Market Hedges by borrowing USD, converting the proceeds into GBP using spot rate, and using the revenues generated in US market to pay back the USD principle and interests in the future. This would provide a "natural" hedge against Jaguar’s dollar revenue stream.
Hedging risk using a spot contract, works similarly in that it also creates a pound obligation 90 days hence. Dozier would borrow pounds and exchange the proceeds into dollars at the spot rate.
1. Take the PV of these yen cash flows at 7.1% This equals Yen 24,258,824,814.179
When currency rate is $1.01, the actual cost incurred is less than the forecasted total cost. Hence, there is a gain for AIFS. When currency rate is $1.22, the actual cost incurred is same as the forecasted total cost. Hence, there is no gain or loss for AIFS. But for currency rate $1.44, it’s a loss & there is risk.
All the future computations are in comparison with the “impact zero” scenario of a rate of USD 1,22/EUR and a volume of 25 000 sales. (Exhibit 2)
Second City Options (SCO) is a small firm that specializes in option trading. Employing 35 people, SCO is located on LaSalle Street in the Chicago financial district. It is a member firm of the Chicago Board Options Exchange (CBOE), where it trades options on stocks and stock indices. It is also a member firm of the Chicago Mercantile Exchange Group (CME Group), where it trades options on futures and the underlying futures contracts.
Practicing CIA (Covered Interest Arbitrage) by borrowing CAD 96 Million to buy USD on April 1, 2002, and invest the USD for six months. At CAD interest rates of 2.70% for borrowing and 2.55% for depositing, and USD interest rates of 1.85% for borrowing and 1.65% for depositing.
2) Minimize the cost associated with the foreign exchange risk management strategy, i.e. the management and hedging costs
303). Subsequently issued bonds after the drop in yen bonds, in the short-term, will probably be set with lower coupon rates making the fixed terms of the already issued dual-currency bond valuable.
Based on your answer to question 2, how would Mesa’s cash flows be affected by the expected exchange rate movements? Explain.