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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
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- A British firm will receive $1 million from a U.S. customer in three months. The firm is considering two strategies to eliminate its foreign exchange exposure. The first strategy is to pledge the $1 million as collateral for a three month loan from a U.S. bank at 4 percent interest. The U.K. firm will then convert the proceeds of the loan to pounds at the spot rate. When the loan is due, the firm will pay the $1 million balance due by handing its U.S. receivable over to the bank. This strategy allows the U.K. firm to “monetize” its receivable immediately. The spot exchange rate is 0.6550 pounds per dollar. The second strategy is to enter a forward contract at an exchange rate of 0.6450 pounds per dollar. This ensures that the U.K. firm will receive £645,000 in three months. If the firm wanted to monetize this payment immediately, it could take out a three-month loan from a U.K. bank at 8 percent, pledging the proceeds of the forward contract as collateral. Which of…Suppose that the treasurer of IBM has an extra cash reserve of $100, 000, 000 to invest for six months. The interest rate is 9 percent per annum in the United States and 8 percent per annum in Germany. Currently, the spot exchange rate is €1.12 per dollar and the six-month forward exchange rate is €1.10 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return?The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is 15 percent per month. The interest rate in Great Britain is .26 percent per month. The spot exchange rate is £.813, and the three-month forward rate is £.827. Ignore transactions costs. a. If the treasurer invested the company's funds in the U.S., how much would the investment be worth after three months? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, 1,234,567.89. b. If the treasurer invested the company's funds in Great Britain, how much would the investment be worth after three months? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, 1,234,567.89. a. U.S. investment b. Great Britain investment
- Gilbert Company, and MNC that has a subsidiary in Mexico, wants to figure out the maximum one-quarter loss due to a potential decline in the Mexican peso's value. Assume that Gilbert believes the expected percentage change in the Mexican peso is -1% during the next quarter, the maximum one-quarter loss is about 1.65 standard deviations away from the expected percentage change in the US. dollar, and that Gilbert estimated the standard deviation of exchange rate movements of the Mexican peso to be 6 percent over the next 40 quarters. Based on these assumptions, Gilbert's maximum expected one quarter loss due to its transaction exposure in Mexican pesos over the next quarter is: O S% O 10.9% O 10.9%You are the vice president of Worldwide InfoXchange,headquartered in Minneapolis, Minnesota. All shareholders of the firm live in the UnitedStates. Earlier this month you obtained a loan of 10 million Canadian dollars from a bankin Toronto to finance the construction of a new plant in Montreal. At the time the loan wasreceived, the exchange rate was $0.81 to the Canadian dollar. By the end of the month, ithas unexpectedly dropped to $0.75. Has your company made a gain or a loss as a result,and by how much?Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 12 percent per annum in the United States and 11 percent per annum in Germany. Currently, the spot exchange rate is €1.20 per dollar and the six-month forward exchange rate is €1.18 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should they invest to maximize the return? Required: a. The maturity value in six months if the extra cash reserve is invested in the U.S.: Note: Do not round intermediate calculations. b. The maturity value in six months if the extra cash reserve is invested in Germany: Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar. c. Where should they invest to maximize the return? a. Maturity value b. Maturity value C. Better investment
- Suppose, Company ABC is U.S. based company and has a British subsidiary. It is expected that the subsidiary will send 10 million pounds in two months to the Company. Thus, Company ABC is concerned that in the next two months the pound will depreciate in value i) Why did Company ABC entered into the currency forward contract by taking short position? ii) Suppose the Forward rate of the pound is $1.357 per pound, and the contract will expire after two months. At delivery/settlement date (two months later), the spot exchange rate is $1.2375 per pound. After two months, how much will Company ABC receive in dollars iii) In the case of cash settlement, how much will Company ABC receive from the dealer? iv) A Firm buys an FRA on 90-day LIBOR expiring in 30 days with Notional principal of $20 million. The contract rate is 10%. If at expiration, LIBOR is 8%, how much will the long has to pay to the short i.e., seller of FRA. What happens if, at expiration, LIBOR is 12%?Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?Suppose that the treasurer of IBM has an extra cash reserve of $400,000 to invest for six months. The six-month interest rate is 4.3 percent per annum in the United States and 3.2 percent per annum in Germany. Currently, the EUR/USD is 1.2248 and the six-month forward exchange rate is1.2351. The treasurer of IBM does not wish to bear any exchange risk. How much would IBM have if they choose to invest in Europe hedging their risk? (USD, no cents)
- Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in six months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a decline in the value of the Swiss franc over the next six months. The U.S. risk-free rate is 1.8 percent, and the Swiss risk-free rate is 0.2 percent. Assume that interest rates are expected to remain fixed over the near future. The current USD/CHF rate is 1.1026. Calculate the price at which the U.S. Company could enter into a forward USD/CHF contract that expires in 180 days (X.XXXX)Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a decline in the value of the Swiss franc over the next three months. The U.S. risk-free rate is 2.9 percent, and the Swiss risk-free rate is 0.9 percent. Assume that interest rates are expected to remain fixed over the near future. The current USD/CHF rate is 1.1059. Calculate the price at which the U.S. Company could enter into a forward USD/CHF contract that expires in 90 days (X.XXXXConsider the currency risk faced by Walt Disney Company (DIS), which generates revenues from all over the world. One of its biggest sources of income is Tokyo Disney. The firm expected to receive ¥500 mln from its Tokyo operation in three months and another ¥500 min in six months. It would like to lock in the exchange rate on these two cash flows and thereby eliminate the risk of an unfavorable move in exchange rates. The investment banker indicates that the three-month forward $/ rate is 0.009123. The investment banker also offers a six-months forward contract at a rate 0.009178 $/¥. What hedging strategy Disney will take? How much home currency will the company receive from its operation in Tokyo in six months?