Chapter 7, Problem 1BIC

Statoil, the national company in Norway, is a large, sophisticated, and active participant in both the currency and petrochemical markets. Although it is a Norwegian company, because it operates within the global oil market, it considers the U.S. dollar ($), rather than the Norwegian krone (Nok), as its functional currency. Ari Karlsen is a currency trading strategist for Statoil. In a daily meeting, the Chief Financial Officer (CFO) gave Ari the following table of market rates: Spot exchange rate: Yen 106/$U.S. dollar interest rate: per annum 10%Japanese Yen interest rate: per annum 6% and told Ari that the company’s financial analyst expected the Japanese Yen to depreciate against the U.S. dollar by 3.46% in 90 days. Assume there are 360 days in a year, and all interest rates are simple interest rates. If the financial analyst’s prediction about the US dollar and Japanese Yen turned out to be true: Would Ari make a profit by borrowing 1 million US dollar and investing in the money…

The treasurer of a major U.S. firm has $41571485 to invest for three months. The annual interest rate in the United States is 0.25% per month. The interest rate in Great Britain is 0.63% per month. The spot exchange rate is £0.72, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.?

Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals). Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios. The following table shows Salem’s cash flows under each of these exchange rates. Use the table to answer the question that follows.   Exchange Rate Scenario   Exchange Rate Scenario   Exchange Rate Scenario C$1=$0.70 C$1=$0.75 C$1=$0.80 (Millions) (Millions) (Millions) Sales           (1) U.S. Sales $315   $315   $315 (2) Canadian Sales $3.50   $4.00   $4.00 (3) Total Sales in U.S. $ $318.50   $318.75   $319.00 Cost of Materials and Operating Expenses           (4)…

A British company has a USD 1 million payable in two months.How can the British company hedge the foreign currency payable? *       A. Buy pounds in the forward market       B. Sell pounds in the spot market       C. Sell US dollars in the spot market       D. Buy US dollars in the forward market

A commercial Bank in Zambia has a net profit after taxes of K10 million with an asset base of K100 million. It is also noted that the equity capital investment for the bank amounts to K20 million. Based on the foregoing, calculate the Return on Equity (RoE) and Return on Assets (RoA). Ensure to also comment on the relationship between the two performance parameters ROE and ROA. Distinguish between the short run and long run determinants of exchange rate volatility. In your assessment show how the exchange rate movements can influence the Interest Parity Condition

IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed 1500 million payable in three months. Currently, the spot exchange rate is v110/S and the three-month forward rate is ¥100/S. The three-month money market interest rate is 12 percent per annum in the United States and 9 percent per annum in Japan. The management of IBM decided to use a money market hedge to deal with this yen account payable Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation b. Conduct a cash flow analysis of the money market hedge a.

Busco has a foreign-currency denominated payable, it can hedge by buying the foreign currency payable forward. The company can expect to eliminate the exposure without incurring costs as long as the forward exchange rate is an unbiased predictor of the future spot rate. Bus Co exported an A350 to a UK business, and was billed the sum of £11,000,000 payable in three months. Currently the spot rate is $1.30/£ and the three-month forward rate is $1.26/£.The three-month money market interest rate is 11% per annum in US and 7% per annum in UK.So the management of Busco decided to manage this transaction exposure and use the money market hedge to deal with this pound account payable. (i) Show how Busco can eliminate the exchange rate exposure by computing the dollar cost of meeting the pound obligation. ii)Conduct a cash flow analysis of the money market hedge.

The following exchange rates are available to you as Finance Manager for Ganado.​ (You can buy or sell at the stated ​rates.) Assume you have an initial SF 12,000,000.   Can you make a profit via triangular​ arbitrage? If​ so, show the steps and calculate the amount of profit in Swiss francs​ (Swissies).    Mt. Fuji Bank ¥92.00=$1.00 Mt. Rushmore Bank SF 1.02=$1.00 Mt. Blanc Bank ¥90.00=SF1.00

Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month.   After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $   , which represents a profit of $    over the initial $200,000 that California Co. used from their own funds.