AshGold Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows:Present spot rate:C$ 1.4000/US$Six-month forward rate:C$ 1.4200/US$Canadian six-month interest rate:13% per annumU.S. six-month interest rate10% per annumThe financial manager’s own analysis suggests that in six months the following spot rates can be expected:Highest expected rate:C$1.4000/US$Most likely rate:C$1.4300/US$Lowest expected rate:C$1.4500/US$Ashgold Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Ashgold’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or disadvantages of each? (2) A key issue facing financial executives of multinational firms is exposure to exchange rate changes.a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play? b. Describe at least three circumstances under which economic exposure is likely to exist? c. Of what relevance are the international Fisher effect and purchasing power parity to your answers to parts a and b? d. What is exchange risk, as distinct from exposure? (3)Two countries, the United States and England produce just one good wheat. Suppose the price of wheat in the United States is $3.25 and in England it is £1.35.a. According to purchasing power parity, what should the $:£ spot exchange rate be? b. Suppose the price of wheat over the next year is expected rise to $3.50 in the United States and to £1.60 in England. What should the one-year $:£ forward rate be c. If the United States government imposes a tariff of $.50 per bushel on wheat imported from England, what is the maximum possible change in the spot exchange rate that could occur?
AshGold Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows:
Present spot rate:
C$ 1.4000/US$
Six-month forward rate:
C$ 1.4200/US$
Canadian six-month interest rate:
13% per annum
U.S. six-month interest rate
10% per annum
The
Highest expected rate:
C$1.4000/US$
Most likely rate:
C$1.4300/US$
Lowest expected rate:
C$1.4500/US$
Ashgold Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Ashgold’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or disadvantages of each?
(2) A key issue facing financial executives of multinational firms is exposure to exchange rate changes.
a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play?
b. Describe at least three circumstances under which economic exposure is likely to exist?
c. Of what relevance are the international Fisher effect and
d. What is exchange risk, as distinct from exposure?
(3)Two countries, the United States and England produce just one good wheat. Suppose the price of wheat in the United States is $3.25 and in England it is £1.35.
a. According to purchasing power parity, what should the $:£ spot exchange rate be?
b. Suppose the price of wheat over the next year is expected rise to $3.50 in the United States and to £1.60 in England. What should the one-year $:£ forward rate be
c. If the United States government imposes a tariff of $.50 per bushel on wheat imported from England, what is the maximum possible change in the spot exchange rate that could occur?
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