Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 35million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure.To hedge against this translation exposure, Warner decides to sell 35 million euros forward. Warner can then purchase euros at the prevailing spot ratein one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.20 and the spot rate for euros currently is also $1.20.If the euro depreciates to a weighted average exchange rate of $1.10 in one year, than the translated earnings for the French subsidiary will be$$million. However, if the value of the euro remains at $1.20, the translated earnings of the French subsidiary would bemillion. This means that a depreciation of the euro would cause the translated earnings of the French subsidiary todecreas

1. If the euro depreciates to $1.10:Translated Earnings Earnings in Euros x Exchange RateTranslated…

Answered: Suppose that Warner Co is 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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Consider a US company, GateCorp, that exports products to the United Kingdom. GateCorp has just closed a sale worth £200,000,000. The amount will be received in two months. Because it will be paid in pounds, the US company bears the exchange risk. In order to hedge this risk, GateCorp intends to use a forward contract that is priced at $1.4272 per pound. Indicate how the company would go about constructing the hedge. Explain what happens when the forward contract expires in two months.
Suppose you, a German importer, expect to pay $1 million in 90 days for taking delivery of import goods from a U.S. exporter. St = $1.14/€; Ft, k = $1.16/€, where k =90 days. If St+k = $1.15/€, what would be the gain or loss from the forward hedge relative to remaining unhedged?
Kansas Corporation, an American company, has a payment of €5.9 million due to Tuscany Corporation one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $ 6,555,556, but Kansas faces the risk that the €/S rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5.9 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $109,000 for a one-year call option on €5.9 million at an exchange rate of 0.88 €/$. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas's net dollar cost for the payable under each strategy? Note: Round your answer to the nearest whole dollar amount.
Pink has just sold equipment to Black. Pink is a US company who has USD accounting. Sale date is March 2020 and payment date is September 2020. Deal amount €2 000 000 Spot March = $1.20/€ 6-month forward contract = $1.14€ Spot September forecast = $1.16/€ Eurozone 6-month borrowing rate = 2.0%/year If Pink hedges 50% of the exposure with forward contracts, then foreign exchange gains/(losses) are _________
A US company needs to make a one-time payment of 50 million dollars in Mexican Pesos in about 6 months, and would like to hedge against the risk that exchange rates may change. Describe in words the hedging strategy that the company should take. Remember that a possible answer is that the company should not be hedging at all.
Kansas Corp., an American company, has a payment of €5.3 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $5,888,889, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5.3 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $103,000 for a one-year call option on €5.3 million at an exchange rate of 0.88 €/$. a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas's net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.) Strategy 1 Strategy 2 Net Dollar Cost b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas's net dollar cost for the payable under each strategy? (Round your answer to the nearest whole…
Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment, what kind of forward contract would you want to enter into?
Airbus, an aircraft manufacturer, has signed a contract to deliver 4 A330-200 passenger aircrafts to Southwest Airlines, a US airline operator, for 1 billion of dollars, to be delivered in 2 years. 20% of the price is paid immediately, while the remaining 80% will be paid only after the delivery. As Airbus incurs most of its costs in Euros, the profitability of this contract is endangered by exchange rates movements. Design a hedging strategy in theoretical terms. Which derivative contracts might be suitable and why?
BK Inc. has $100,000 that can be used for arbitrage in the forex market. The interest rate is US is 4% and in Europe is 5%. The current exchange rate USD to EUR is 0.87. The company expects that after a year, the exchange rate may not be favourable and executes a forward contract at EUR to USD 1.23. Calculate the net profit or loss of this covered interest arbitrage if the investment is made in Europe. Answer Choices: a. The net profit is $8,360.50 The net loss is $4,000.00 b. c. The net profit is $5,360.50 d. The net loss is $1,000.00
Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €17 million which is payable in one year. The current EUR/USD rate is 1.0559 and the one-year forward rate is 1.0747. The annual interest rate is 4.2% in the U.S. and 1.4% in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. It is considering to hedge borrowing euros from Credit Lyonnaise against the euro receivable. How much will they receive in one year? (USD, no cents)
Lakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is expected to produce cash flows of €1.6 million in Year 1, €2.1 million in Year 2, and €3.2 million in Year 3. The current spot exchange rate is €.94/$ and the current risk-free rate in the United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 percent, 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 €7.8 million. What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to 2 decimal places, e.g., 1,234,567.89.) NPV
Lakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is expected to produce cash flows of €1.6 million in Year 1, €2.1 million in Year 2, and €3.2 million in Year 3. The current spot exchange rate is €.94/$ and the current risk-free rate in the United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 percent, 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 €7.8 million. What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. $ 1,404,385.52 X NPV

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