Johnson & Johnson, Inc., a U.S.-based MNC, will need 15 million Brazilian Reals on December 1. It is now September 1. Johnson & Johnson has negotiated a non- deliverable forward contract with its bank. The reference rate is the Brazilian Real's closing exchange rate (in $) quoted by Brazil's central bank in 90 days. The Braziliam Real's spot rate today is $.22. If the rate quoted by Brazil's central bank on December 1 is $.26, Johnson will, pay; 600,000 be paid; 60,000 be paid; 600,000

Johnson & Johnson, Inc., a U.S.-based MNC, will need 15 million Brazilian Reals on December 1. It is now September 1. Johnson & Johnson has negotiated a non- deliverable forward contract with its bank. The reference rate is the Brazilian Real's closing exchange rate (in $) quoted by Brazil's central bank in 90 days. The Braziliam Real's spot rate today is $.22. If the rate quoted by Brazil's central bank on December 1 is $.26, Johnson will, pay; 600,000 be paid; 60,000 be paid; 600,000

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 4ST

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Pfizer, an American corporation, just signed a contract to sell laboratory equipment for COVID -19 research to Bayer AG- a German corporation. Bayer AG will be billed €10 million, which is receivable in 3 months. The current spot exchange rate is $1.1290/€ and the 3-month forward rate is $1.1945/€. The U.S. annual deposit rate is 4.0% and annual U.S. borrowing rate is 8%. The annual borrowing rate at the Dresden Bank (Germany) is 8.0%. Pfizer’s cost of capital is 10% per annum. Put options on Euro are available at strike rate of $1.1960/€ and premium of 1.0%. Call options on Euro are available at strike rate of $1.1970/€ and premium of 1.5%. Pfizer is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. Outline how you would deal with transaction exposure. Calculate and discuss different hedging alternatives. Which alternative would you recommend? Why?
Consider a U.S.-based company that exports goods to Switzerland. The U.S. company expects to receive a payment of 50,000 Swiss Francs (CHF) on a shipment of goods in 6 months' time. The U.S. interest rate is 2% p.a., and the Swiss interest rate is 4% p.a. Assume that the current spot rate is CHF0.96/USD. Which of the following statements is correct: The risk to the U.S. company is that the value of the Swiss franc will rise and therefore it should enter into a contract to buy Swiss francs forward The risk to the U.S. company is that the value of the Swiss franc will decline and therefore it should enter into a contract to buy Swiss francs forward The risk to the U.S. company is that the value of the Swiss franc will decline and therefore it should enter into a contract to sell Swiss francs forward The risk to the U.S. company is that the value of the Swiss franc will rise and therefore it should enter into a contract to sell Swiss francs forward
Blur Ltd, a UK importer, expects to make a payment of 1.8m Australian dollars (A$) for sure in one year from now. Blur will need to pay for the A$ currency in sterling (£). Assume that the Australian dollar’s spot exchange rate now is A$=£0.56, the one-year forward rate is A$=£0.59, and the discount rate is zero. Blur may need to pay an additional A$3.1m one year from now if it agrees a deal with a new Australian supplier, also payable in one year from now. The probability of this deal being agreed is 0.5. If the deal is not agreed (probability 0.5), Blur makes no payment to the new supplier. Suppose for parts (a) and (b) that the spot rate in one year is A$=£0.58. Assume Blur chooses to enter into a forward exchange contract for the maximum possible payment of A$4.9m. What actions will the firm take and what will be the value of its net payments in £, if in one year: the new deal is agreed? the new deal is not agreed? What will be the expected value of Blur’s net payment in…
A UK company owes an American company $100,000 due to be paid in three months. The company wishes to avoid exchange rate risk, so borrows enough in sterling now and converts it immediately to dollars which are invested to bring in the required amount in three months' time. The following information is available: Spot rate $/£ 1.7755 - 1.7765 3-month interest rates: Sterling 3.250% US dollar 2.425% How much will the UK company have to borrow now to clear the debt in three months? A. £54,958 B. £54,989 £56,744 D. £56,775 C.
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Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥250 million The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥96 = $1. The current interest rate on one-year U.S. Treasury bills is 6%, and on one-year Japanese government bonds the interest rate is 4%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need to exchange today in order to have ¥250 million in one year. (Round your response to the nearest dollar)
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Use the following information for Problems 11 and 12.MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2017, with payment of 10 million South Korean won to be received on March 31, 2018. The following exchange rates apply:MNC’s incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.Assuming that MNC entered into a forward contract to sell 10 million South Korean won on December 1, 2017, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2017 resulting from a fluctuation in the value of the won?a. No impact on net income.b. $58.80 decrease in net income.c. $2,000 decrease in net income.d. $1,941.20 increase in net income.
Use the following information for Problems 11 and 12.MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2017, with payment of 10 million South Korean won to be received on March 31, 2018. The following exchange rates apply:MNC’s incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.Assuming that MNC did not enter into a forward contract, how much foreign exchange gain or loss should it report on its 2017 income statement with regard to this transaction?a. $5,000 gainb. $3,000 gainc. $2,000 lossd. $1,000 loss