Forecasting Cash Flows and Hedging Decision Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HKS) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against the U.S. dollar and is presently worth $0.03. Virginia Co. expects that during this year, the U.S. inflation rate will be 2 percent, the Thailand inflation rate will be 11 percent, and the Hong Kong inflation rate will be 3 percent. The firm expects that purchasing power parity will hold for any exchange rate that is not fixed (pegged). Virginia Co. will receive 10 million Thai baht and 10 million Hong Kong dollars at the end of one year from its subsidiaries. Determine the expected amount of dollars to be received from the Thai subsidiary in one year when the baht receivables are converted to U.S. dollars. The Hong Kong subsidiary will send HK\$1 million to make a payment for supplies to the Thai subsidiary. Determine the expected amount of baht that will be received by the Thai subsidiary when the Hong Kong dollar receivables are converted to Thai baht. Assume that interest rate parity exists. Also assume that the real one-year interest rate in the United States is 10 percent, whereas the real interest rate in Thailand is 3 percent. Determine the expected amount of dollars to be received by Virginia Co. if it uses a one-year for ward contract today to hedge the receivables of 10 million baht that will arrive in one year.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 11, Problem 39QA
Textbook Problem

Forecasting Cash Flows and Hedging Decision Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HKS) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against the U.S. dollar and is presently worth $0.03. Virginia Co. expects that during this year, the U.S. inflation rate will be 2 percent, the Thailand inflation rate will be 11 percent, and the Hong Kong inflation rate will be 3 percent. The firm expects that purchasing power parity will hold for any exchange rate that is not fixed (pegged). Virginia Co. will receive 10 million Thai baht and 10 million Hong Kong dollars at the end of one year from its subsidiaries.

  1. Determine the expected amount of dollars to be received from the Thai subsidiary in one year when the baht receivables are converted to U.S. dollars.
  2. The Hong Kong subsidiary will send HK\$1 million to make a payment for supplies to the Thai subsidiary. Determine the expected amount of baht that will be received by the Thai subsidiary when the Hong Kong dollar receivables are converted to Thai baht.
  3. Assume that interest rate parity exists. Also assume that the real one-year interest rate in the United States is 10 percent, whereas the real interest rate in Thailand is 3 percent. Determine the expected amount of dollars to be received by Virginia Co. if it uses a one-year for ward contract today to hedge the receivables of 10 million baht that will arrive in one year.

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