DLY is a new car’s company in Germany. They intend to start production next year. DLY has a franchise in the US. Economists believe that the euro will depreciate next year. Advice the company what should they do to manage the currency risk

DLY is a new car’s company in Germany. They intend to start production next year. DLY has a franchise in the US. Economists believe that the euro will depreciate next year. Advice the company what should they do to manage the currency risk

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 8Q

See similar textbooks

Related questions

Q: Suppose that expectations are not taken into account and US investors shift their funds into Europe.…

A: An investor is defined as the person, which used to allocate the capital along with an expectation…

Q: If a French citizen deposits $10,000 in Chase Bank inNew York, have Eurodollars been created? What…

A: Answer: Eurodollars are U.S dollars deposited in accounts outside the US, usually in the banks of…

Q: General Motors exports cars to Spain but the strong dollar against the euro hurts sales of GM cars…

A: Economic Exposure A company is prone to economic exposure which occurs due to changes in currency…

Q: What could the company do to reduce its economic exposure to the euro? Check all that apply:…

A: Economic exposure is like a foreign exchange exposure which are caused by unexpected future foreign…

Q: 1. Suppose your company just exported 1 million dollars goods to USA on 15 December 2016, the spot…

A: The question is related to the Money market hedge. Home currency is RMB and foreign currency is US$.…

Q: To force the value of the British pound to depreciate against the dollar, the Federal Reserve…

A: Foreign exchange fluctuations are based on supply and demand for the currency in the exchange market…

Q: Explain your understanding of currency hedging. Why is hedging necessary? If your company is…

A: Foreign exchange- Foreign exchange is the conversion of one currency into another at a specific rate…

Q: Carpet Baggers, Inc., is proposing to construct a new bagging plant in a country in Europe. The two…

A: Spot exchange rate for euros is $1.45/€ Spot exchange rate for Swiss francs is SFr1.65/$ Interest…

Q: Assume you are in India and borrowed 800,000 Rs from one of your friends who lives in Australia.…

A: The question is related to forex management. The details are given below.

Q: An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next…

A: The answer is option (d) [ i.e Forward market] Refer step 2 for explanation

Q: BL lives in the US and has $800,000 surplus funds that he wants to invest for one year in any…

A: a.) Covered interest arbitrage is an arbitration trading strategy whereby an investor capitalises on…

Q: Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in…

A: Answer Project Value $14.830 Yes, We should Undertake the project

Q: If the price of a pair of shoes in the U.S. is $80, the price of the pair of and the exchange same…

A: Answer 3. The correct exchange rate should be 2US/Euro, making the value correct. However, with…

Q: Recently the US Dollar has been gaining strength against the EURO. This is good news for US…

A: Currencies of many nations float freely against each other. This means that their values will…

Q: It is 2024 and Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in…

A: The net present value is used as a measure of the profitability of a project by discounting future…

Q: Which of the following is an example of economic exposure but not an example of transaction…

A: There are three types of exposures: 1. Translation exposure 2. Transaction exposure 3. Economic…

Q: Ahmed is an Omani importer. He is expecting to receive a commodity from China within 30 days. The…

A: Onami is a importer and currency here is OMR, and exporter is China based and currency is CHY, so…

Q: A US company needs to make a one-time payment of 50 million dollars in Mexican Pesos in about 6…

A: Option contract : An option contract is an agreement to purchase an asset at a defined price on a…

Q: General Motors exports cars to Spain but the strong dollar against the euro hurts sales of GM cars…

A: Foreign exchange- Foreign exchange is the conversion of one currency into another at a specific rate…

Q: What is a eurodollar? If a French citizen deposits $10,000 in Chase Manhattan Bank in NewYork have…

A: Eurodollar is nothing but the deposit of the dollars that are held by any financial institution…

Q: The pressures on the foreign exchange market are such that they cause the British pound to…

A: Currency Depreciation: In this question, the pressure on the foreign exchange market causes the…

Q: A British company has a USD 1 million payable in two months.How can the British company hedge the…

A: Hedging means techniques or procedures used to eliminate or reduce the risk exposure to due to…

Q: The company hired You as a financial consultant to manage the currency risk. You expect that the US’…

A: Hello. Since you have posted multiple questions and not specified which question needs to be solved,…

Q: Your company located in the US imports raw materials from Europe. If the European Central Bank…

A: The term exchange rate refers to the rate at which the currency of one country is exchanged for…

Q: Consider a large Australian cotton farmer who has just planted her crop. Once grown, she plans to…

A: a. (i)When the decrease in U.S. production means the US is not able to fulfill the demand of china…

Q: Carpet Baggers, Inc., is proposing to construct a new bagging plant in a country in Europe. The two…

A: Forward rate in units of currency 1 per one unit of currency 2 With spot rate (S in units of…

Q: Suppose you work at the FOREX desk of a multinational bank. No particular country is the home…

A: The bank could make a UIA profit if the no-arbitrage price is not similar to the quoted exchange…

Q: Alice Inc. imports manufactured goods from Ireland to the U.S. Aliceâ€™s revenues are primarily in…

A: alice inc expose to currency risk with expenses in Euros considering engaging in option contract…

Q: How can Golden Ltd lessen its exposure in the case?

A: Hedging is the method or more precisely about is the strategy which is followed by the company so…

Q: Fergusson Corporation, a U.S. company, manufactures components for the automobile industry. In the…

Q: A US manufacturing firm that produces cars in Mexico to sell in the US and the Eurozone would like…

A: Hedging is a risk management strategy that is used by individuals and corporations for offsetting…

Q: Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures…

A: Journal entries are the primary reporting of transactions in the accounting books.

Q: investor has $2m to invest and has the option of placing it in a us bank account paying 2% annually,…

Q: ABC Co. expects a payment from an American customer in 30 days. To hedge its currency exposure, ABC…

A: Solution:- Forward means entering into an agreement to sell or buy something on a future date at…

Q: Lagoon (a U.S. firm) will be receiving 4 million British pounds in one year. It will need to make a…

A: The question is based on the concept of business finance.

Q: We are a car dealership in NOLA. We will import Japanese Cars (Suzuki) for JPY 200,000,000 We will…

A: Transactions for hedging 1) Pay 20 Million JPY in 3 months - Foreign exchange risk involved 2)…

Concept explainers

Global issues

While studying the global issues, it is important to read the following topics to get a better knowledge:

Question

Definition Video Definition Accounting method wherein the cost of a tangible asset is spread over the asset's useful life. Depreciation usually denotes how much of the asset's value has been used up and is usually considered an operating expense. Depreciation occurs through normal wear and tear, obsolescence, accidents, etc. Video

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Introduction

VIEW

Answer

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Suppose you are working for a company based in Ireland (where the euro is used). This company exports product to the UK, but invoices its prices in euros (instead of pounds). Suppose you believe the euro will appreciate versus the pound over the coming year. Would that impact the profitability of your company this year? If not, explain. If so, explain how (and the type of risk you’re facing.
A multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollars
We are a car dealership in NOLA. We will import Japanese Cars (Suzuki) for JPY 200,000,000 We will pay in 3 months We will sell these cars in the US for USD We will collect USD within the 3 months Risk defined We are collecting USD now (within the 3 months) We will buy JPY in 3 months (to pay for our debt of JPY 200,000,000) What if the JPY value against the USD goes up? Please hedge this foreign exchange risk using derivatives similar to our class discussion on March 9th. Please upload your spreadsheet showing your work.
The treasurer of a major U.S. firm has $41571485 to invest for three months. The annual interest rate in the United States is 0.25% per month. The interest rate in Great Britain is 0.63% per month. The spot exchange rate is £0.72, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.?
A US manufacturing firm that produces cars in Mexico to sell in the US and the Eurozone would like to reduce the effect of currency fluctuations on its profits. Describe in words the hedging strategy that the company should take. Remember that a possible answer is that the company should not be hedging at all.
An investor has $2m to invest and has the option of placing it in a US bank account paying 2% annually, or in a German bank, where the annual rate of interest is only 2.5%. If the current exchange rate for the Euro is given as $1.4250, at what 1-year Dollar-Euro forward rate of exchange would the investor get the same return from investing in the US as he/she would by investing in Germany? Please show your work.
Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain.
an investor has $2m to invest and has the option of placing it in a us bank account paying 2% annually, or in a german bank, where the annual rate of interest is only 2.5%. if the current exchange rate for the euro is given as $1.4250, at what 1-year dollar-euro forward rate of exchange would the investor get the same return from investing in the us as he/she would by investing in germany?
Your company located in the US imports raw materials from Europe. If the European Central Bank announces to lower the Euro exchange rate, what impact do you expect to see in your business? A. Your company will pay higher US dollar costs to import from Europe. B. Your company will pay lower US dollar costs to import from Europe. C. The Euro exchange rate doesn't have any impact on your company. D. It should reduce your competitiveness in your home market.
In the following cases, state which type of exchange rate risk the company is facing and wheter this risk is beneficial or harmful in nature. A British power-generating company imports coal from Germany, paying for the coal in euros. The company expects the pound to weaken against the euro over the next year. A UK toy company supplies only the domestic market. Its only major competitor in this market if a US toy company. The pound is expected to weaken against the dollar over the next year. A UK company has bought a factory in France, financing the purchase with a sterling borrowing. Over the next year the pound is expected to appreciate against the euro.
Alice Inc. imports manufactured goods from Ireland to the U.S. Aliceâ€™s revenues are primarily in US dollars and expenses are primarily in Euros. The CEO of Alice is concerned about her currency exposure over the next six months and is considering engaging in an option contract with Euros as the underlying asset (S). Which transaction would you recommend?a) Buy callsb) Buy putsc) Write callsd) Write putse) Options are unable to hedge Euro expenses
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ , which represents a profit of $ over the initial $200,000 that California Co. used from their own funds.