Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 22, Problem 22QP
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Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment, what kind of forward contract would you want to enter into?
The current spot exchange rate is $1.60/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?
A.
Sell €1,000,000 forward for $1.60/€, and you expect to gain $20,000.
B.
Buy €1,000,000 forward for $1.55/€, and you expect to gain $70,000.
C.
Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€.
D.
Buy €1,000,000 forward for $1.60/€, and you expect to gain $20,000.
You have bid for a possible export order that would provide a cash inflow of €1 million in 6 months. The spot exchange rate is USD1.31
= EUR1, and the 1-year forward rate is USD1.29 = EUR1. There are two sources of uncertainty: (i) The euro could appreciate or
depreciate, and (i) you may or may not receive the export order. Fill in the following table to illustrate in each case the profits or losses
that you would make if you sell €1 million forward by filling in the following table. Assume that the exchange rate in 1 year will be either
USD1.21 = EUR1 or USD1.41 = EUR1. (Negative values should be indicated by a minus sign. Do not round intermediate calculations.
Enter your answers in millions rounded to 2 decimal places.)
Total Profit/Loss (in millions)
Spot Rate
Receive Order
Lose Order
USD1.21 = EUR1
USD1.41 = EUR1
Chapter 22 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 22 - Prob. 1QPCh. 22 - Prob. 2QPCh. 22 - Prob. 3QPCh. 22 - Prob. 4QPCh. 22 - Prob. 5QPCh. 22 - Prob. 6QPCh. 22 - Prob. 7QPCh. 22 - Prob. 8QPCh. 22 - Prob. 9QPCh. 22 - Prob. 10QP
Ch. 22 - Prob. 11QPCh. 22 - Prob. 12QPCh. 22 - Prob. 13QPCh. 22 - Prob. 14QPCh. 22 - Prob. 15QPCh. 22 - Prob. 16QPCh. 22 - Prob. 17QPCh. 22 - Prob. 18QPCh. 22 - Prob. 19QPCh. 22 - Prob. 20QPCh. 22 - Prob. 21QPCh. 22 - Prob. 22QPCh. 22 - Prob. 24QPCh. 22 - Prob. 26QPCh. 22 - Prob. 27QPCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MC
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