Chapter 1, Problem 1CT

“Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in foreign currencies. The potential for loss arises from the process of revaluing foreign currency positions in rupee terms. The Group’s foreign exchange risk is presently limited to future cash flows in foreign currencies arising from foreign exchange transactions and translation of net open position in foreign currencies. The Group is carefully monitoring the net foreign currency exposure as well as utilizing the currency swap and forward contract to hedge the related exposure.”   Assets (Rs)  Liabilities (Rs)  Net foreign currency exposure(Rs)         United States Dollar 1,676,431 1,624,382 52,049 Great Britain Pound 40,884 73,931 -33,047 Japanese Yen 5,209 0 5,209 Euro 51,011 98,973 -47,962 Other currencies 4,489 120 4,369   1,778,024 1,797,406 -19,382     Required: Elaborate in…

Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals). Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios. The following table shows Salem’s cash flows under each of these exchange rates. Use the table to answer the question that follows.   Exchange Rate Scenario   Exchange Rate Scenario   Exchange Rate Scenario C$1=$0.70 C$1=$0.75 C$1=$0.80 (Millions) (Millions) (Millions) Sales           (1) U.S. Sales $315   $315   $315 (2) Canadian Sales $3.50   $4.00   $4.00 (3) Total Sales in U.S. $ $318.50   $318.75   $319.00 Cost of Materials and Operating Expenses           (4)…

1. Explain the differences and similarities between Forward, Futures, andOptions. Then why can there be a Long Term Funding Deficit related to a company's cash flows? and Explain the meaning of international parity conditions, and why it can be used to predict exchange rates. and what is the meaning of foreign exchange exposure and types of foreign exchange exposure faced by multinational companies.