Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 27, Problem 11P
Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today’s spot rate. The firm’s
On the same day, Desreumaux agrees to purchase 15,000 more watches in 3 months at the same price of 1 million Swiss francs.
- a. What is the cost of the watches in U.S. dollars, if purchased at today’s spot rate?
- b. What is the cost in dollars of the second 15,000 batch if payment is made in 90 days and the spot rate at that time equals today’s 90-day forward rate?
- c. If the exchange rate for is 0.50 Swiss francs per dollar in 90 days, how much will Desreumaux have to pay (in dollars) for the watches?
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Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today's spot rate. The firm's financial manager, James Desreumaux, has noted the following current spot and forward rates:
U.S. Dollar / Franc
Franc / U.S. Dollar
Spot
1.6590
0.6028
30-day forward
1.6540
0.6046
90-day forward
1.6460
0.6075
180-day forward
1.6400
0.6098
On the same day, Desreumaux agrees to purchase 15,000 more watches in 3 months at the same price of 1 million francs.
What is the cost of the watches, in U.S. dollars, if purchased at today's spot rate?
Cost of Watches
=
Swiss Francs
/
Franc/U.S
Dollar
Intelledex, Inc., a robotics manufacturer based in Corvallis, Oregon, has won a bid to deliver robotics equipment to a Swiss automobile company. The bid is SF8 million. Intelledex will receive the entire SF8 million upon delivery of the equipment six months from now. The present spot rate for the Swiss franc is SF8.000/$, and the six-month forward rate is SF8.2000/$. Intelledex can borrow U.S. dollars at 12% per annum or Swiss francs at 17% per annum. Its opportunity cost of capital is 14% per annum.
1. Explain the various ways in which Intelledex could cover its foreign exchangeexposure. 2. What would the bread-even opportunity cost of capital have to be for them to beindifferent between the various alternatives?3. Explain how economic exposure might change the expected profitability of this order.
Kristo Asafo Tools Ltd is filling an order from a Korean industrial company for machinery worth 160,000,000 Won. The export sale is denominated in Korean Won and is on a one-year open account basis. The opportunity cost of funds for Kristo Asafo Tools Ltd is 8%
The Current spot rate between Won and Dollars is 800 Won/$. The forward Won sells at a discount of 12% per annum, but the finance staff of Kristo Asafo Tools Believes that the Won will drop only 9% in value over the next year. Kristo Asafo Tools Ltd faces the following choices
This question compares the cost of a money market hedge with a forward hedge, and considers both alternatives against the possibility of remaining unhedged.
a) Wait one year to receive the won amount and exchange Won for dollars at that time
b) Sell the Won proceeds of the sale forward today
c) Borrow Won from a Seoul bond at 20% per annum against the expected future receipt of the Korean importer’s payment
d) What do you recommend and why?
Chapter 27 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 27 - Define each of the following terms: a....Ch. 27 - Prob. 2QCh. 27 - Prob. 3QCh. 27 - Prob. 4QCh. 27 - If the United States imports more goods from...Ch. 27 - Prob. 6QCh. 27 - Should firms require higher rates of return on...Ch. 27 - Prob. 8QCh. 27 - Prob. 9QCh. 27 - Prob. 10Q
Ch. 27 - Prob. 1PCh. 27 - The nominal yield on 6-month T-bills is 7%, while...Ch. 27 - Prob. 3PCh. 27 - If euros sell for 1.50 (U.S.) per euro, what...Ch. 27 - Suppose that the exchange rate is 0.60 dollars per...Ch. 27 - Prob. 6PCh. 27 - Prob. 7PCh. 27 - Prob. 8PCh. 27 - Prob. 9PCh. 27 - Prob. 10PCh. 27 - Boisjoly Watch Imports has agreed to purchase...Ch. 27 - Prob. 12PCh. 27 - Prob. 13PCh. 27 - Prob. 14PCh. 27 - Prob. 1MCCh. 27 - Prob. 2MCCh. 27 - Prob. 3MCCh. 27 - Prob. 4MCCh. 27 - Prob. 5MCCh. 27 - Prob. 6MCCh. 27 - Prob. 7MCCh. 27 - Prob. 8MCCh. 27 - Prob. 9MCCh. 27 - Prob. 10MCCh. 27 - Prob. 11MCCh. 27 - Prob. 13MC
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