Please answer both subparts. 1. An australian company, X, currently exports bulk of its production to a Malaysian company under a fixed AUD pricing arrangement with settlement terms 180 days after delivery. Given that movements

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter10: Measuring Exposure To Exchange Rate Fluctuations

Section: Chapter Questions

Problem 3ST

See similar textbooks

Related questions

Q: On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a…

A: In the given problem, here the Yuan is selling at a discount in the forward Market where( Forward…

Q: Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months.…

A: Importer is the person who purchase the goods from foreign country. When the goods are purchased by…

Q: Suppose that the Reserve Bank of New Zealand believes the New Zealand dollar (NZD) is too weak and…

A: Facts in the given question: Reserve Bank of New Zealand believes the New Zealand dollar (NZD) is…

Q: Based on the information provided in the table below, calculate the contribution to total…

A: Exchange rate: It is the value of a currency for the purpose of exchanging with another.

Q: that Australia's central bank ced plans to stabilize the Australian A$) in the foreign exchange…

A: Premium is required for option purchases of currency.

Q: The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two…

A: Purchasing power parity" The purchasing power parity is a concept which is used for measurement of…

Q: 1) Explain how each of the following scenarios, holding other things equal, will affect the value of…

A: As per our guidelines, we are supposed to answer only 3 sub-parts (if there are multiple sub-parts…

Q: Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million…

A: DEAR is the estimated loss of a portfolio with the change in market conditions such as change in…

Q: ABC Company, an Australian firm, has a USD 385 million payable in one year. ABC is concerned that…

A: If the exchange rate increases then ABC company has to pay more Australian dollars because liability…

Q: On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a…

A: The Yuan is selling at discount in forward market <spot rate. The forward contract include a…

Q: AussieGold Ltd., an Australian gold mining company, sells gold to U.S. clients in USD. The company…

A: The scenario given in the question involve 2 things: one is the price of gold and other is the…

Q: HSL Inc., a U.S.-based MNC, imports goods from Canada, and HSL Inc. records its payables in Canadian…

A: To protect against the appreciation of the Canadian dollar I being the importer should apply the…

Q: Assume a Japanese firm is going to receive an amount of exports sales in U.S. dollars. Assume that…

A: The amount is to be received in US $ Then the amount is to be converted into Japanese Yen. If the US…

Q: The current bid-offer quote between Australian dollar and the US dollar, AUD/USD, is 0.7201-0.7205,…

A: Here, Bid Offer Rate of AUD/USD is 0.7201-0.7205 Bid Offer Rate of GBP/USD is 1.3479-1.3483 Payment…

Q: he following are the spot and the swap forward rates of the AUD/USD Spot…

A: A spot rate, or spot cost, addresses a contracted cost for the buy or offer of an item, security, or…

Q: Suppose a US firm was producing all its goods in Mexico and selling them in the Euro area, at a time…

A: Currency appreciation: When the value of a currency increases as against the other, then it is known…

Q: Busco has a foreign-currency denominated payable, it can hedge by buying the foreign currency…

A: The put option: The currency put option gives the buyer a right but not the obligation to sell the…

Q: Under a managed-float exchange rates regime, if the rate of inflation in Australia is less than the…

A: Higher rate of inflation in any country tends to have a negative impact on its currency. Since it…

Q: 1. Assume the following exchange rates for the New Zealand dollar in terms of the US dollar: North…

A: Locational arbitrage is possible when there are discrepancies in the quotation of exchange rates by…

Q: Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price…

A: A foreign exchange gain or loss occurs due to the difference between the exchange rate in the two…

Q: 1. XYZ, an Australian exporter, has entered into a contract to sell goods in 6 months time and will…

A: 1) Economic exposure studies the impact of an exchange-rate change on the present value of expected…

Q: Determine the amount of U.S. dollars that New York Co. will need in two years to make its payment.

A: According to interest rate parity therom currency with higher interest rate will sell in discount in…

Q: rates and prices today: the spot exchange rate today: AU$2.05 per U.K pound; the price level in…

A: According to purchase power parity the prices in two countries must be in equilibrium with exchange…

Q: Given the following information: Exchange rate - Canadian dollar 0.665 per DM (spot) 1 Canadian…

A: Arbitrage is a strategy that uses the difference in the price of the same commodity in different…

Q: lent on the payment date despite having a USD4,000 sale. (B) ABC Corporation pays a foreign-currency…

A: Step 1 Foreign currency rate changes can harm a given transaction before settlement, which is known…

Q: If the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer such…

A: An appreciation of United States dollar, which used to have less income for forming the dollars from…

Q: An U.S. firm requires C$230,000 in 90 days to pay the imports from Canada. To avoid currency…

A: Whenever there is an involvement of foreign currency in the transaction, it results in foreign…

Q: If Ukraine’s economy becomes highly infl ationary, Eurexim will most likely translate inventory by:A…

A: A multinational firm needs to convert the accounts of subsidiary into firm’s local currency so that…

Q: An Australian mining company exports iron ore to other countries, such as China, South Korea and…

A: Derivatives refer to those financial instruments that derive their value from one or more…

Q: JJ Fashion Wholesalers Ltd, an Indian clothing manufacturer, has a contract to purchase cotton from…

Q: ou are a proprietary trader under the FX Group of BDO Treasury Department. Due to the political and…

A: We will buy foreign currency at ask rate and sell at bid rate.

Q: Wesfarmers (Australian MNC) has imported heavy machinery totaling USD25 million and the payable is…

A: Wesfarmers(Australian MNC) will pay USD 25 Million to BHF (US MNC) in one year Base rate is the rate…

Q: What amount will Shandra Corporation report as foreign exchange gain or loss in net income for the…

A: Feb 20: Spot price = 1.36 per pound Duration of call option = 2 months Quantity = 100000 pounds…

Q: A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1…

A: Note: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question…

Q: From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 280…

A: Purchasing power parity attempts to covert and compute exchange rates between two currencies by…

Q: On November 1, 2020, Entity A entered into a firm commitment for the exportation of goods at a price…

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

Q: On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a…

A: A journal entry is a form of accounting entry that is used to report a business transaction in a…

Q: uppose Dassie Bank quoted the exchange rate of Singapore dollar in US$ at $0.60, the pound rate in…

A: Due to triangular arbitrage there are mispricing in market due to which buying and selling happens…

Q: An australian company, X, currently exports bulk of its production to a Malaysian company under a…

A: In finance, the risk is the probability that actual results will differ from expected results. In…

Q: of the following relationships between the expected future spot rate [E(e)] of a foreign currency…

A: A speculator will be profitable by selling if he expects fall in future spot rate of foreign…

Concept explainers

Instruments of Foreign Exchange Market

Foreign exchange is a worldwide market in which one nation’s currency is converted into another nation’s currency. In further terms, exchanging of nations currency with foreign currencies. Foreign exchange happens at a specified rate which is termed the foreign exchange rate. The exchange rates are not constant continuously changing as they are derived by market forces of supply and demand. Widely used foreign currencies are the United States- dollar, Euro, Japanese Yen, British pound, and Australian dollar. US- dollar is the most denominated foreign currency. The Euro to US dollar is a widely used currency pair in the forex market as these two currencies represent the world’s enormous economy. Forex trade is simple as exchanging currencies at the bank. The main players of forex markets are the central banks, financial institutions, intermediaries, investments banks, and other banks. Central Bank is the supreme player who decides the currency value of their own nation on the forex market. Mostly foreign exchange-traded at FX market (forex market) when tourists’ visits a foreign country, import, and export happens between two countries.

Question

Please answer both subparts. 1. An australian company, X, currently exports bulk of its production to a Malaysian company under a fixed AUD pricing arrangement with settlement terms 180 days after delivery. Given that movements in the AUD and commodity prices have traditionally been highly correlated, what is the primary risk faced by X in respect of these exports and explain why? (a) Credit Risk (b) Liquidity Risk (c) Interest Rate risk (d) Commodity price rise 2. XYZ, an Australian company, receives 80 % of its revenue in AUD and the remainder in USD. Its employees have been on strike for 3 months but XYZ has an obligation to continue to make lease payments on its equipments. What is the primary risk faced by XYZ and why? (a) Credit Risk (b) Liquidity Risk (c) Interest Rate risk (d) Commodity price rise

Expert Solution

This question has been solved!

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

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 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

Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).
1. An australian company, X, currently exports bulk of its production to a Malaysian company under a fixed AUD pricing arrangement with settlement terms 180 days after delivery. Given that movements in the AUD and commodity prices have traditionally been highly correlated, what is the primary risk faced by X in respect of these exports and explain why? (a) Credit Risk (b) Liquidity Risk (c) Interest Rate risk (d) Commodity price rise
Please answer both subparts. 1. XYZ, an Australian exporter, has entered into a contract to sell goods in 6 months time and will receive USD 1 million for these goods. What type of exposure is this an example of and why? (a) Economic exposure (b) Translation exposure (c) Transaction exposure (d) Competitive exposure 2. How can a firm protect itself against economic exposure? (a) Money market hedges (b) Geographical diversification (c) Forward contract hedges (d) Futures market hedging
Given the following information, are there geographic arbitrage opportunities available? If so, what level of additional transaction costs in each market will eliminate this opportunity? (All quotes are at time 0). Quotes for the US dollar in South Korea: 1361-1385 Quotes for the South Korean Won in the US: 0.000741 - 0.000762.
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.
Masons intends to purchase goods valued at £2.09 million, with payment due in one year. To mitigate the exchange rate risk associated with the £2.09 million payment, Masons is considering the forward market hedging strategy. Using the data provided in Table 1, determine the cost in Chinese yuan (CNY) when employing the forward market hedging strategy. (Please input the value as a whole number, excluding any signs or symbols). TABLE 1 For Chinese yuan (CNY) Spot rate £0.3755/CNY One-year forward rate £0.5381/CNY One-year CNY deposit and borrowing rate 8.48% One-year call options Exercise price = £0.52 Premium = £0.03 One-year put options Exercise price = £0.58 Premium = £0.06 For British Pound (£) Spot rate CNY3.5909/£ One-year forward rate CNY1.918/£ One-year £ deposit and borrowing rate 4.71% One-year call options Exercise price = CNY1.64 Premium = CNY0.17…
Your company sells specialized electronic components to South Africa payable in South African Rands (ZAR). The following information is available on the $/ZAR exchange rates expected to prevail at the end of the year. The local prices of the electronic components are affected by the value of ZAR as shown below. Qi (Prob) Si Local Price (P’i) Pi (price in dollars) 0.20 $0.0550 ZAR 30,000.00 $1,650.00 0.30 $0.0600 ZAR 27,500.00 $1,650.000.30 $0.0650 ZAR 25,000.00 $1,625.00 0.20 $0.0700 ZAR 22,500.00 $1,575.00 a. What is relationship, as measured by β, between $/ZAR rates and the component prices in US dollars. b. Explain how you can hedge the above exposure using currency futures. The one-year forward rate…