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- Hedging using forward rates: Assume the hypothetical spot rate between the JPY and USD was 101.25 JPY per USD. Suppose you are purchasing 2000000 JPY worth of microprocessors deliverable (product and payment) in 3 months with the contract set up between you and your supplier on Friday. How much is that shipment worth in USD. Assume that you want to hedge against exchange rate risk, and go to the bank. The financial specialist at the bank gives you the official 3 month forward rate at 101.18 JPY per USD. What does that imply for your payment to the bank in 3 months?M2 Manitowoc Crane (A). Manitowoc Crane (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 12,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan (renminbi) has been trading at Yuan7.60/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan8.50/$, after which it will remain unchanged for at least a decade. Accepting this forecast as given, Manitowoc Crane faces a pricing decision in the face of the impending devaluation. It may either (1) maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or (2) maintain the same dollar price, raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit volume. Direct costs are 75% of the U.S. sales price. a. What would be the short-run (one-year) impact of each pricing strategy? b. Which do you recommend? a. If Manitowoc Crane maintains the same yuan…RiverRock Capital Geneva (B). Christoph Hoffeman of RiverRock Capital now believes the Swiss franc (CHF) will appreciate versus the U.S. dollar in the coming 3-month period. He has USD100,000 to invest. The current spot rate is USD 0.5820 = CHF 1.00, the 3-month forward rate is USD0.5640=CHF1.00, and he expects the spot rates to reach USD 0.6250 = CHF 1.00 in three months. Calculate Christoph’s expected profit assuming a pure spot market speculation strategy. Calculate Christoph’s expected profit assuming he buys or sells CHG three months forward.
- Hedging using forward rates: Assume the hypothetical spot rate between the USD and GBP was 1.6187 USD per GBP. Suppose you are purchasing 200000 GBP worth of Scotch Whisky deliverable (product and payment) in 3 months with the contract set up between you and your supplier on Friday. How much is that shipment worth in USD. Assume that you want to hedge against exchange rate risk, and go to the bank. The financial specialist at the bank gives you the official 3 month forward rate at 1.6175 USD per GBP. What does that imply for your payment to the bank in 3 months to get the 200000 GBP?Hithergreen 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 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$1.4500/US$ Hithergreen 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. Hithergreen’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or…Assume that You are risk manager at BIC Investment. BIC firm wants to fixcurrency rate for 5.000.000 USD export transaction in 120 days and 3.000.000 EURO importtransaction in 180 days from AC Bank. Find bid and ask forward rate of AC Bank by usingexchange rates and interest rates below USD/TL: 5,8725/5,9850 EURO/TL: 6,6700/6,7250 USD faiz oranı: 4,50/5,00EURO Faiz Oranı: 6,25/7,50 TLLIBOR: 24,25/26,00
- Assume the 3-month rate on AAA-rated banker’s acceptance is currently trading at 4% p.a. (per annum). A exporter holding a letter of credit (LC) from a AAA-rated bank with a face value of $1,000,000 wishes to sell it in the market. What price can she expect to receive?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…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?
- Dynamic Futon forecasts the following purchases from suppliers: Jan. Feb. Mar. Apr. May Jun. Value of goods ($ millions) 33 29 26 23 21 21 a. Fifty percent of goods are supplied cash-on-delivery. The remainder are paid with an average delay of one month. If Dynamic Futon starts the year with payables of $23 million, what is the forecasted level of payables for each month? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.) b. Suppose that from the start of the year the company stretches payables by paying 50% after one month and 30% after two months. (The remainder continue to be paid cash on delivery.) Recalculate payables for each month assuming that there are no cash penalties for late payment. (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)Assume that you are risk manager at BIC investment. BIC firm wants to fix currency rate for 5,000,000USD export transcation in 120 days and 3,000,000EURO import transcation in 180 days from AC Bank. Find bid and ask forward rate of AC Bank by using exchange rates and interest rate below. USD/TL : 13.37/13.98 EURO/TL : 15.27/15.42 USD interest rate: 0.50/1.00 EURO interest rate: 1.25/2.50 TL interest rate: 21.00/27.00Question 01 Dell (US Company) is evaluating the proposal of a new Keyboard and computer accessories factory in an overseas country (Germany). The currency in the overseas country is Euro. The risk-free rate in the United States is 5 percent. Dell will be renting a premise of 50,000 Square feet for this facility. Annually the factory expects to sell 20,000 units of Keyboard at 3 per keyboard. Currently, the Euro and USD have an exchange rate of €1/$2. The total capital cost is 1.5 million USD and is depreciated using the straight-line method over three years to a zero-salvage value. Dell’s discount rate is 10%, and its home currency is USD. Assume; initially, Dell will require .1 million Euros in working capital for this project. However, after the project, Dell will not receive anything from the working capital. In Germany, the CFFA will be 0.9 million euros in the first year, followed by 1 million euros in the second year. The inflation rate in the United States is 8%, and the…
