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Consider 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?
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- Consider this case: Sebrele Enterprises Inc. is a U.S. firm evaluating a project in Australia. You have the following information about the project: The project requires an investment of AU$915,000 today and is expected to generate cash flows of AU$900,000 at the end of each of the next two years. The current exchange rate of the U.S. dollar against the Australian dollar is $0.7823 per Australian dollar (AUS). The one-year forward exchange rate is $0.8102 / AU$, and the two-year forward exchange rate is $0.8412 / AU$. The firm's weighted average cost of capital (WACC) is 9.5%, and the project is of average risk. What is the dollar-denominated net present value (NPV) of this project? $610,602 $726,908 $581,526 $639,679arrow_forwardThe treasurer of a major U.S. firm has $38 million to invest for three months. The interest rate in the United States is .55 percent per month. The interest rate in Great Britain is .59 percent per month. The spot exchange rate is £.76, and the three-month forward rate is £77. Ignore transaction costs. a. If the treasurer invested the company's funds in the U.S., how much would the investment be worth after three months? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. b. If the treasurer invested the company's funds in Great Britain, how much would the investment be worth after three months in U.S. dollars? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. a. U.S. investment b. Great Britain investmentarrow_forwardABC Inc. has 10,000,000 Yen worth of receivables it expects to collect in 3 months’ time. To hedge its currency risk, it decided to hedge with a forward contract at a forward exchange rate of 100 Yen/US$. In 3 months’ time, the exchange rate is 105 Yen/US$. How much does ABC Inc. receive?arrow_forward
- TNB has a 10-year, ¥50 million loan outstanding with a Japanese bank. The Yen loanhas a 2.5% annual interest rate. The loan was taken 5 years ago and so has 5 more yearsto go. Daibochi, a Japanese plastics maker with operations in Malaysia has justnegotiated a RM 5 million, 5-year loan with Maybank at 7.5% annual interest. Bothcompanies are worried about the foreign exchange exposure. Design a currency swapthat will enable both companies to manage exchange rate risk. (Assume debt servicingwill be on 6-monthly basis, the spot Yen/Ringgit rate is 10 Yen/Ringgit).arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €18,406,730 and is expected to produce cash flows of €3,681,369 in Year 1, €4,992,682 in Year 2, and €6,337,782 in Year 3. The current spot exchange rate is $1.23/€ and the current risk-free rate in the United States is 3.71%, compared to that in Europe of 3.03%. The appropriate discount rate for the project is estimated to be 10.55%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €12,529,609. What is the NPV of the project?arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €20,065,563 and is expected to produce cash flows of €3,524,370 in Year 1, €4,549,121 in Year 2, and €5,590,740 in Year 3. The current spot exchange rate is $1.38/€ and the current risk-free rate in the United States is 3%, compared to that in Europe of 3.08%. The appropriate discount rate for the project is estimated to be 11.07%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €13,733,917. What is the NPV of the project?arrow_forward
- An American firm wants to borrow 100 million USD for 1 year to fund a capital investment project. The firm can borrow the money from a U.S. bank at an interest rate of 6%. Alternatively, the firm could borrow British pounds at a rate of 3% a year. At the end of the year, the firm would pay back the loan and interest. The initial exchange rate is 1 GBP = 2 USD. If at the end of the year the exchange rate changes from 1 GBP = 2 USD to 1 GBP = 3 USD, what was the actual cost of borrowing (effective interest rate) if the American firm chose to obtain the loan in British pounds?arrow_forwardSuppose that Cleveland Co. engages in international business, with transactions denominated in four different foreign currencies: the euro, the Canadian dollar, the Australian dollar, and the Mexican peso. The company wishes to measure its cash flows in a single currency, the dollar, over the next quarter. The following table shows the total cash inflows and outflows for each currency, along with the expected exchange rate for that currency. For each row in the table, enter the net inflow or outflow in that currency for the MNC. Then, enter the dollar value of that inflow or outflow in the last column of the table. Total Inflow (Millions) 30 euros Note: Remember to enter a negative sign if a value is negative. Currency Euro Net Inflow or Outflow (Millions) Total Outflow Expected Exchange (Millions) Rate Net Inflow or Outflow, In Dollars (Millions) 15 euros euros $1.20 Canadian Dollar $C30 $C20 C$ $0.90 +A Australian Dollar $A10 $A20 A$ $0.50 Mexican peso 20 pesos 30 pesos peso $0.10 +A…arrow_forwardYou work for a firm whose home currency is the British Pound (GBP) and that is considering a foreign investment. The investment yields expected after-tax Russian Ruble (RUB) cash flows (in millions) as follows: -RUB1170 in Year 0, and RUB521 in each of the 3 years of the life of the project. The expected rates of inflation in each country are constant per year: 4.30% in Russia, and 9.10% in the UK. From the project's perspective the required return is 6.63%, while from the parent's perspective, the required rate of return is 11.56%. The spot exchange rate is GBP0.008314/RUB. What is the NPV of the project from the parent company's perspective? O a. GBP1.713 million O b. GBP2.779 million O c. GBP24,779.23 million O d. GBP40,209.27 million O e. None of the options in this question are correct.arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
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