Insurance premium. Introduction: To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

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Answer 1

Question

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Summary Introduction

To discuss: The sources of gain.

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Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

You are the CFO of a US firm whose wholly owned subsidiary in Mexico manufactures component parts for your US assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30% against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take?

Weyerhauser is a US based forest products firm In June Weyerhauser delivers a shipment of raw lumber to Japan The y55,000,000 receivables is due 180 days The firm’s foreign exchange advisors believe the yen will be at about y115/$ then, Current spot rate is y110/$ Weyerhauser has received 180 day forward quote of y108/$ If the company does nothing and the exchange rate goes to y115 as expected How much will the firm receive in dollars in 180 days? Is this cash flow risky or known with certainly today?

Answer 2

Question

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Summary Introduction

To discuss: The sources of gain.

Expert Solution & Answer

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Answer 3

Question

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Summary Introduction

To discuss: The sources of gain.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 4

Question

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Summary Introduction

To discuss: The sources of gain.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Summary Introduction

To discuss: The sources of gain.

Answer 6

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

Answer 7

Chapter 30, Problem 3P

a)

Summary Introduction

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

Answer 8

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Answer 9

b)

Summary Introduction

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

Answer 10

Summary Introduction

To discuss: The sources of gain.

Answer 11

Summary Introduction

To discuss: The sources of gain.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 30.1 - How can insurance add value to a firm?Ch. 30.1 - Prob. 2CC Ch. 30.2 - Prob. 1CC Ch. 30.2 - What are the potential risks associated with...Ch. 30.3 - How can firms hedge exchange rate risk?Ch. 30.3 - Prob. 2CC Ch. 30.4 - How do we calculate the duration of a portfolio?Ch. 30.4 - How do firms manage interest rate risk?Ch. 30 - The William Companies (WMB) owns and operates...Ch. 30 - Genentechs main facility is located in South San...

Insurance premium. Introduction: To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

Solution Summary: The author explains that a firm pays an insurance premium instead of purchasing the insurance to pay off the losses. The cost of capital is 0.025.

Concept explainers

Videos

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.

To discuss: The sources of gain.

Want to see the full answer?

Chapter 30 Solutions

Insurance premium. Introduction: To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

Solution Summary: The author explains that a firm pays an insurance premium instead of purchasing the insurance to pay off the losses. The cost of capital is 0.025.

Concept explainers

Videos

To determine: Insurance premium. Introduction: To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

To determine: The net present value. Introduction: Net present value refers to the difference between the cash inflow and cash outflow.

To discuss: The sources of gain.

Want to see the full answer?

Chapter 30 Solutions

To determine: Insurance premium.

Introduction:

To manage risk, a firm pays a yearly payment called insurance premium, instead of purchasing the insurance to pay off the losses.

To determine: The net present value.

Introduction:

Net present value refers to the difference between the cash inflow and cash outflow.