CORPORATE FINANCE - CONNECT ACCESS
12th Edition
ISBN: 9781264054893
Author: Ross
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 31, Problem 10CQ
Exchange Rate Risk If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is there any value in hedging your currency exposure?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
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?
Suppose the spot rate of the yen today is $0.0100 while the three-month forward rate is $0.0096. How can a U.S. exporter who is to receive 350,000 yen in three month hedge its foreign exchange risk? What happens if the exporter does not hedge and the spot rate of the yen in three months is $0.0098?
Foreign exchange investment involves risks and at the same time returns. Considering you will invest your peso @ P50 = $1 foreign exchange with a fixed interest of 5%, when can you say that you are fully maximized the value of your investment upon maturity?
a. Interest and proceeds received in full deposit to a bank account
b. Interest received in full with current exchange rate @ P52 = $1 but retained the money in USD while waiting for another investment.
c. Interest received in full with current exchange rate @ 52 = $1 and converted the full proceeds to peso
d. Interest received in full with current exchange rate @ 52 = $1 but converted the interest only while waiting for another investment.
Chapter 31 Solutions
CORPORATE FINANCE - CONNECT ACCESS
Ch. 31 - Spot and Forward Rates Suppose the exchange rate...Ch. 31 - Prob. 2CQCh. 31 - Prob. 3CQCh. 31 - Prob. 4CQCh. 31 - International Risks At one point, Duracell...Ch. 31 - Multinational Corporations Given that many...Ch. 31 - Prob. 7CQCh. 31 - Exchange Rate Movements Some countries encourage...Ch. 31 - Prob. 9CQCh. 31 - Exchange Rate Risk If you are an exporter who must...
Ch. 31 - International Capital Budgeting Suppose it is your...Ch. 31 - International Capital Budgeting An investment in a...Ch. 31 - International Borrowing If a U.S. firm raises...Ch. 31 - International Investment If financial markets arc...Ch. 31 - Prob. 1MCCh. 31 - What will happen to the companys profits if the...Ch. 31 - How can the company hedge its exchange rate risk?...Ch. 31 - Taking all factors into account, should the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Topic: risk mitigation by various types of hedging. You know you have to purchase a large quantity of some product from Europe a year from now, you face the risk that the value of the euro could increase dramatically, thus costing you a lot of money. Fortunately, there are ways to hedge this risk, so that if the euro does increase relative to the dollar, your hedge minimizes your losses. Question: What does " if the euro does increase relative to the dollar, your hedge minimizes your losses" mean? What is the further explanationarrow_forwardWhich one of the following statements is correct about the exchange rates? A country with high inflation may see its currency to appreciate according to the asset market approach. Current interest rates are is=1% and iç-3.5% and they will stay constant for many years. We would expect the Euro to appreciate against dollar according to the uncovered interest rate parity. When the central bank of Australia raises interest rate to a level that is more than all traders expected, i.e. an unexpected rise in interest rate, the Australian dollar will depreciate. O The European Central Bank announces to increase interest rate by 0.1%. The market consensus was 0.2% increase before the announcement. Upon the news, we would see euro to appreciate. Price of currency futures(or forwards) will be slightly lower than the spot exchange rate at maturity.arrow_forwardThe prevailing one-year risk-free interest rate in Argentina is higher than in the U.S. and will continue to be higher over time. Sycamore Co. believes the international Fisher effect (IFE) can be used to derive the best forecast of the peso's exchange rate movement over time. In contrast, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? Briefly explain.arrow_forward
- A. Suppose the dollar interest rate and the euro interest rate are the same and equal 2 percent per year. Suppose the expected future $/€ exchange rate is $1.20 per 1 €. Suppose now Euro interest rate decreases to 1 percent per year. Determine how the new equilibrium $/€ exchange rate will change if the US interest rate remains constant. B. Indicate how the change in the Euro interest rate will affect the equilibrium $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.arrow_forwardAn Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well suited to offer hedging protection against this transactions risk exposure? a. Inflation rate market O b. Transactions market C. Spot market O d. Forward marketarrow_forwardif we to use the monetary approach to exchange rate determination, what would be the predicted effect on the xchange rate of domestic currency if domestic real income increasesarrow_forward
- 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 4.2 percent, and the U.K. risk-free rate is 1 percent. These rates are expected to remain unchanged over the next 2 months. The current spot rate is $1.3084. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 60 days. (X.XXXX)arrow_forwardSuppose the real exchange rate is constant – say, at the level required for net exports (or the current account) to equal zero. In this case, if foreign inflation is higher than domestic inflation, what must happen to the nominal exchange rate over time?arrow_forwardSuppose 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 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 5.0 percent, and the U.K. risk-free rate is 4.0 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $1.80. Required: Whether you should use a long or short forward contract to hedge the currency risk. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 30 days. Move forward 10 days. The spot rate is $1.83. Interest rates are unchanged. Calculate the value of your forward position.arrow_forward
- Suppose that the interest rate on a US dollar deposit is 3% and the interest rate on a Japanese yen deposit is 1%. Today’s exchange rate is $1/¥ and the expected rate one year in the future is $1.2/¥, so $100 today can be exchanges for ¥100. Which currency deposit yield a higher expected rate of return (which currency investors should be willing to hold)? Why?arrow_forwardWhat 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…arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License