Suppose that Colorado Co., a U.S. based MNC, seeks to assess its transaction exposure using the value-at-risk (VaR) method over the next quarter. Itis primarily concerned about its exposure in euros, as it has determined that the remainder of its portfolio is such that the effects of currencyfluctuations typically offset.Suppose that, based on historical data, it has determined that the expected change in the value of the euro is -2.00% over the next quarter and thatthe standard deviation of these changes is 2.00%. Colorado assumes that these changes are normally distributed, such that the maximum quarterlyloss lies within 1.65 standard deviations below the expected change with 95% confidence.Under this scenario, the maximum one-quarter loss due to transaction exposure is approximatelywith 95% confidence.Now suppose that, based on updated data, the standard deviation of changes in the euro is actually 5.00%. All else remains unchanged.Under this scenario the maximum one-quarter loss due to transaction exposure is apsmallerlargerwith 95% confidence.Based on these results, the larger standard deviation of the change in the euro, thethe maximum loss will be.

Under the first scenario, where the expected change in the value of the euro is -2.00% and the…

Answered: Suppose that Colorado Co., a U.S. based…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter12: Managing Economic Exposure And Translation Exposure

Section: Chapter Questions

Problem 3IEE

See similar textbooks

Similar questions

As a currency analyst, you must provide targets for the value of the Canadian dollar versus the U.S. dollar over both the next quarter and the next year. How do you proceed? What theories could you use in order to predict the value of the CAD? (Describe in some detail at least 3)
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. If California Co. takes $200,000 of its own funds and converts them to pounds it would have 600,000 euros and converts them to pounds, it will have pounds. pounds. If California Co. borrows
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 1 month, California Co. now has 693,600 pounds after investing their converted pounds. However, it is now time for California Co. to repay the 600,000 euro loan. If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total of rate of 1.25, this repayment is equivalent to pounds. euros. At the cross pounds. Thus, after repaying the loan, California Co. will have
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.
If the foreign interest rate is 4%, the risk premium on domestic assets, ρ, is 18%, and the expected rate of depreciation of the domestic currency against the foreign currency is 3%, what is the domestic interest rate in percentage terms, given covered interest parity holds? [All variables have a 1-year time frame.]
Suppose that a French firm would like to have its stock available through an American Depository Receipt (ADR). If the firm’s stock is currently selling for €75 and that the exchange rate between the € and the $ is €1.0=$1.0592. What price should we expect for the ADR in US dollars? Suppose that over the next year the dollar reaches parity with the Euro, i.e., $1.00=€1.00 and that the price of the French firm’s stock rises to €100. What would expect the price of the ADR to be?
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)
An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well suited to offer hedging protection against this transactions risk exposure? a. Inflation rate market O b. Transactions market C. Spot market O d. Forward market
Bank USA recently purchased $10 million worth of euro-denominated one-year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $1.104/€1. a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro? b. What will be the return on the one-year CD if the dollar appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.004/€1? (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) c. What will be the return on the one-year CD if the dollar depreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.204/€1? (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) a. Exposure b. Return if dollar appreciates C. Return if dollar depreciates Appreciation 10.440 % 32.440 %
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.XXXX
The next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. An arbitrage can be obtained by investing in the currency that is expressing the other currency. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. O e. None of the option in this question are correct. O a. O b. O c. What should the forward rate be for the International Fisher Effect to hold? GBP1.4875/USD GBP1.3904/USD USD1.3904/GBP d. USD1.4875/GBP O e. None of the options in this question. a. O b. Oc
Required:a. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate falls to $1.20/£1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year.b. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate rises to $1.40/£1 and the lira spot foreign exchange rate rises to $0.17/TL1 over the year.c. Suppose that the FI funds the $250 million U.S. loans with $250 million one-year U.S. CD at a rate of 4 percent; funds $150 equivalent British loans with $150 million equivalent one-year pound CDs at a rate of 5 percent; funds $100 million equivalent Turkish loans with $100 million equivalent one-year Turkish lira CDs at a rate of 6 percent. Assume no other changes. What will the FI’s balance sheet look like…

SEE MORE QUESTIONS

Recommended textbooks for you

International Financial Management

Finance

ISBN:

9780357130698

Author:

Madura

Publisher:

Cengage

International Financial Management

Finance

ISBN:

9780357130698

Author:

Madura

Publisher:

Cengage

SEE MORE TEXTBOOKS