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…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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D6) 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.]
Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging? a. b. Would you recommend hedging this euro…
Suppose that in 2020, the rate of inflation in Denmark was 0.6%, and the rate of inflation in the Euro area was 2.2%. If the Euro depreciated relative to the Danish Krone by 0.75% in the same year, what would be the magnitude of the movement of the real exchange rate (RER) of the Euro relative to the Danish Krone? Euro appreciated in real terms by 2.35 percent. Euro depreciated in real terms by 2.30 percent. Euro appreciated in real terms by 100.83 percent. O d. Euro appreciated in real terms by 0.83 percent. O c.
(Transaction Exposure)Trident — A U.S.-based company, has concluded a sale of telecommunications equipment to Regency (U.K.). A total payment of £2,000,000 is due in 90 days. Given the following exchange rates and interest rates, the break-even investment rate (for money market hedge) is _________% when comparing the forward hedge and the money market hedge. Assumptions Value 90-day A/R in pounds £2,000,000.00 Spot rate, US$ per pound ($/£) $1.5610 90-day forward rate, US$ per pound ($/£) $1.544 3-month U.S. dollar investment rate 14.000% 3-month U.S. dollar borrowing rate 12.000% 3-month UK investment interest rate 7.500% 3-month UK borrowing interest rate 10.000% Put options on the British pound: Strike rates, US$/pound ($/£) Strike rate ($/£) $1.55 Put option premium 1.2% Strike rate ($/£) $1.54 Put option premium 1.1% Strike rate ($/£) $1.55 Call option premium 2.1%…
(C) US Bank is considering investing in a three years' project in Europe country. The project would require an initial investment of $750,000 and it is expected to generate €80,000, €100,000 and €150,000 in year one until three, respectively. The business risk will be identical to the firm's existing line of business in the euro-zone, the required rate of return in the euro-zone is 18 percent. The exchange rate is $1.20/€ where the dollar also shows appreciating by one percent for every year. Determine the Net Present Value (NPV) in dollar currency for this project and justify.
As the chief financial officer of a U.S. firm, you expect to receive payment of €1 million in 90 davs. The current spot rate is $1.40 per euro. Your firm will incur losses on the deal if the dollar weakens to less than $1.10 per euro. Please list at least two derivatives and discuss your detailed strategy to hedge against this foreign exchange risk.
The US 1 year spot rate is 3.61% and the Mexican 1 year spot rate is 7.44%. A US investor purchases a Mexican corporate bond with an expected 1 year return of 9.76%, as measured in Mexican peso. The current USD/MXP exchange rate is 0.18. If the investor decides to hedge the currency risk exposure in the forward market, what would be the expected return on this portfolio, if interest rate parity holds?
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Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)
Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United States and 3.3% in Germany. In the spot market, 1 euro equals $1.50. What is the 90-day forward rate?

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