Chapter 12, Problem 2BIC

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.?

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.

Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 60 days. You will be making payment on a shipment of imported goods in 60 days and want to hedge your currency exposure. The U.S. risk-free rate is 3.3 percent, and the U.K. risk-free rate is 1.8 percent. These rates are expected to remain unchanged over the next 2 months. The current spot rate is $1.3069. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 60 days. (X.XXXX)

Suppose, Company ABC is U.S. based company and has a British subsidiary. It is expected that the subsidiary will send 10 million pounds in two months to the Company. Thus, Company ABC is concerned that in the next two months the pound will depreciate in value i) Why did Company ABC entered into the currency forward contract by taking short position? ii) Suppose the Forward rate of the pound is $1.357 per pound, and the contract will expire after two months. At delivery/settlement date (two months later), the spot exchange rate is $1.2375 per pound. After two months, how much will Company ABC receive in dollars iii) In the case of cash settlement, how much will Company ABC receive from the dealer? iv) A Firm buys an FRA on 90-day LIBOR expiring in 30 days with Notional principal of $20 million. The contract rate is 10%. If at expiration, LIBOR is 8%, how much will the long has to pay to the short i.e., seller of FRA. What happens if, at expiration, LIBOR is 12%?

The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.5 million, a one year period, an initial spot rate of SF1.5000/$, a 5.000% cost of debt, and a 34% tax rate, what is the effective cost of debt for one year for a U.S. dollar-based company if the exchange rate at the end of the period was: a. SF1.5000/$ b. SF1.4400/$ c. SF1.3860/$ d. SF1.6240/%

Credible Research sold a microchip to the Vausten Institute in Germany on credit and invoiced €10 million payable within half a year. Currently, the 6-month forward exchange rate is $1.10/€ and the foreign exchange advisor for Credible Research predicts that the spot rate is likely to be $1.05/€ in 6 months. (i) What would be the expected gain or loss from the forward hedging? (ii) As a decision-maker for Credible Research, would you suggest hedging this euro receivable? Please explain why or why not? (iii) what if the foreign exchange advisor anticipates that the future spot rate will be similar to the forward exchange rate quoted today. As the decision-maker would you propose hedging in this case? If yes or no why?

Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures copper-related products. It forecasts that it will sell 5,000 feet of copper tubing to one of its largest customers at a price of ¥50,000,000. Although this sale has not been firmly committed, Cleveland expects that the sale will occur in six months on June 30, 2022. Thus, Cleveland is exposed to changes in foreign currency exchange rates. To reduce this exposure, Cleveland enters into a six-month foreign currency exchange forward contract with a third-party dealer on January 1, 2022, to deliver ¥ and receive US$. The foreign exchange contract has the following terms:Contract amount:              ¥50,000,000Maturity date:                   June 30, 2022Forward contract rate:      ¥105.00 = US $1.00Yen / US$ Exchange rates:  Date Spot rate Forward rate for June 30 January 1 ¥100.00/US $1.00 ¥105.00/US $1.00 March 31 ¥102.00/US $1.00 ¥108.00/US $1.00 June 30 ¥110.00/US $1.00…