Concept explainers
COMMUNICATION CASE—FORWARD CONTRACTS AND OPTIONS
Palmetto Bug Extermination Corporation (PBEC), a U.S. company, regularly purchases chemicals from a supplier in Switzerland with the invoice price denominated in Swiss francs. PBEC has experienced several foreign exchange losses in the post year due to increases in the U.S. dollar price of the Swiss currency. As a result. Dewey Nukem, PBEC’s CEO, has asked you to investigate the possibility of using derivative financial instruments, specifically foreign currency forward contracts and foreign currency options, to hedge the company’s exposure to foreign exchange risk.
Required
Draft a memo to CEO Nukem
Want to see the full answer?
Check out a sample textbook solutionChapter 9 Solutions
ADV. ACCT CONNECT STAND ALONE
- If a U.S.-based company regularly purchases goods from foreign suppliers in Japan with the invoice price denominated in Japanese Yen. And if the U.S. company has experienced several foreign exchange losses due to the appreciation of the Japanese Yen. I am confused about which type of hedging instrument (Foreign currency forward contract or foreign currency option) the company should employ. Can you please help me to understand a justification for the selection? Maybe to illustrate, you can compare the advantages and disadvantages of using (Forward contracts) and (Options) to hedge foreign exchange risk.arrow_forwardAssume your firm has transferred you to Zurich Switzerland. You work in the triangular arbitrage division. View the following exchange rates. Is an arbitrage opportunity available? If not, explain why an opportunity does not exist. If so, from the Swiss point of view show how to exploit the opportunity. CHF .8976 = $1.00, $.0130 = INR 1.00, INR 92.7904 = CHF 1 Now say instead of working in Zurich, you were employed in Mumbai, India. How does that change your thinking on the arbitrage? PLEASE ANWSER CORRECTLY AND SHOW WORKarrow_forwardAn U.S. firm requires C$230,000 in 90 days to pay the imports from Canada. To avoid currency exchange rate risk, it needs to __________ A. purchase Canadian dollars (C$) 90 days from now at the spot rate B. obtain a 90-day forward sale contract on Canadian dollars (C$) C. obtain a 90-day forward purchase contract on Canadian dollars (C$) D. sell Canadian dollars (C$) 90 days from now at the spot ratearrow_forward