Chapter 13, Problem 2BIC

An investor has $2m to invest and has the option of placing it in a US bank account paying 2% annually, or in a German bank, where the annual rate of interest is only 2.5%. If the current exchange rate for the Euro is given as $1.4250, at what 1-year Dollar-Euro forward rate of exchange would the investor get the same return from investing in the US as he/she would by investing in Germany? Please show your work.

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.

What are the expected spot Canadian/Bruneian exchange rates over the next six years? Is the Canadian dollar expected to depreciate or appreciate against the Bruneian dollar during this project period? Is this prediction favourable to Blooming Blueberries’ project?    2)What is the NPV of the project? Barry suggests the use of the Home Currency pproach.    3)What other exchange rate risk exposure should the company consider before investing in the project? Explain these risk exposures to Larry.    4)What other risk factors (besides exchange rate risk) should the company consider before investing in the project? Search The Straits Times (from Singapore) for news on Brunei, and identify one major issue that the company may face, other than exchange rate risk, that could sway Larry one way or the other regarding investing in Brunei.    5-If the company is able to borrow the 1 million Brunei dollars capital from a local bank in Brunei at 10%, will it make a difference whether it borrows…

Suppose you want to buy a German car, which costs €55,000. What will be price of this car in the United States if the exchange rate is €0.90 per U.S. dollar? What will happen to the price if the exchange rate increases to €0.95 per U.S. dollar?

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?

If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: A. obtain a 90-day forward purchase contract on Canadian dollars. B. obtain a 90-day forward sale contract on Canadian dollars. C. purchase Canadian dollars 90 days from now at the spot rate. D. sell Canadian dollars 90 days from now at the spot rate.

A multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollars

1. Your company is exporting product to Peru. Your best guess is that, over the coming year, you will have sales equal to 55 million Peruvian Soles (their currency). However, those sales will depend a lot on the results of the upcoming election in Peru and could, in reality range from a value of 40 million to 75 million soles. If you decide to enter a hedge for 55 million soles, what are the risks from doing so? Are there ways to reduce that risk? At what cost?

B&G Co. is planning a project in France. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the U.S. The project would end in one year, when all earnings would be remitted to B&G Co. Assume that no additional corporate taxes are incurred beyond those imposed by the French government. Since B&G Co. would rent space, it would not have any long-term assets in France, and expects the salvage (terminal) value of the project to be about zero. Assume that the project’s required rate of return is 25 percent. Also assume that the initial outlay required by the parent to fill the store with clothes is $320,000. The pretax earnings are expected to the €650,000 at the end of one year. The euro is expected to be worth $1.21 at the end of one year, when the after-tax earnings are converted to dollars and remitted to the United States. The following forms of country risk, which are independent, must be considered: * The French economy may weaken…