Question: Each of the following U.S. firms

> Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three months before the next order will arrive. In other words,

> Explain how a Malaysian firm can use the forward market to hedge periodic purchases of U.S. goods denominated in U.S. dollars. Explain how a French firm can use forward contracts to hedge periodic sales of goods to U.S. importers that are invoiced in dol

> At the current time, the Sports Exports Company focuses on producing footballs and exporting them to a distributor in the United Kingdom. The exports are denominated in British pounds. Jim Logan, the company’s owner, plans to develop other sporting goods

> During the Asian crisis, some local firms in Asia borrowed U.S. dollars rather than local currency to support their local operations. Why would they borrow dollars when they really needed their local currency to support operations? Why did this strategy

> Your firm exports goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to hedge your British pound receivables in some way. Would a forw

> Suppose your firm is a U.S. importer of Mexican goods, and you believe that today’s forward rate of the peso is a very accurate estimate of the future spot rate. Do you think Mexican peso call options would be a more appropriate hedge than the forward he

> Would Montana Co.’s real cost of hedging Japanese yen payables have been positive, negative, or about zero, on average, over a period in which the yen weakened consistently? Explain.

> If interest rate parity exists, would a forward hedge be more favorable than, the same as, or less favorable than a money market hedge on euro payables? Explain

> Would Oregon Co.’s real cost of hedging Australian dollar payables every 90 days have been positive, negative, or about zero onaverage over a period in which the Australian dollar strengthened consistently? What does this imply about the forward rate as

> Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the Singapore dollar is $0.50, and the Singapore interest rate is 2 percent over 90 days. Suggest how the U.S. firm could implement a money market

> As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250,000 New Zealand dollars 90 days from now. Put options are available for a premium of $0.03 per unit and an exercise price of

> Explain how a firm can use currency diversification to reduce its transaction exposure.

> Explain how a firm can use cross-hedging to reduce its transaction exposure.

> Under what conditions would Zona Co.’s subsidiary consider using a leading strategy to reduce transaction exposure? Under what conditions would Zona Co.’s subsidiary consider using a lagging strategy to reduce transaction exposure?

> Blades, Inc., just received a special order for 120,000 pairs of Speedos, its primary roller blades product. Ben Holt, Blades’ chief financial officer (CFO), needs shortterm financing to finance this large order from the time Blades orders its supplies u

> How can a firm hedge its long-term currency positions? Elaborate on each method.

> Can Brooklyn Co. determine whether currency options will be more or less expensive than a forward hedge when considering both hedging techniques to cover net payables in euros? Why or why not?

> Relate the use of currency options to hedging net payables and receivables. That is, when should a firm purchase currency puts, and when should it purchase currency calls? Why would Cleveland, Inc., consider hedging net payables or net receivables with c

> Assume the following information: Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it bebetter off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each t

> Assume the following information: Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate

> Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected inflation there. Kayla expects that the Mexican peso w

> Explain the relationship between hedging (discussed in this chapter) and measuring exposure (discussed in Chapter 10)

> What factors affect a firm’s degree of translation exposure? Explain how each factor influences translation exposure

> Memphis Co. hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.

> Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?

> The Sports Exports Company produces footballs and exports them to a distributor in the United Kingdom. It typically sends footballs in bulk and then receives payment after the distributor receives the shipment. The business relationship with the distribu

> Fischer, Inc., a U.S.- based MNC, exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why?

> How should appreciation of a firm’s home country currency generally affect its cash inflows? How should depreciation of a firm’s home country currency generally affect its cash outflows?

> Bag Company, a U.S. firm, has a business of offering cruises along the coast of Argentina that are solely geared toward American tourists. The company charges American tourists in U.S. dollars, but all of its expenses, such as payments to its employees,

> Milwaukee Co. has an Australian subsidiary that earned 40 million Australian dollars (A$) this year. Little Rock Co. has an Australian subsidiary that earned A$30 million this year. Milwaukee’s subsidiary plans to reinvest its earnings in Australia, wher

> Spencer Co., a U.S. firm, has a large subsidiary in Singapore that generates a large amount of the parent’s earnings. Spencer’s stock is usually valued at approximately 16 times its reported earnings per share. The earnings generated by the Singapore sub

> Reese Co. will pay 1 million British pounds for materials imported from the United Kingdom in one month. This firm also sells some goods to Poland and will receive 3 million zloty (the Polish currency) for those goods in one month. The spot rate of the p

> Yazoo, Inc., is a U.S. firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $0.01. The yen exchange rate was $0.008 three months ago, $0.0085 two months ago, and $0.009 one mont

> Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to eurozone countries. All of its earnings are derived from its exports. The exports are denominated in euros. Reed Co., a U.S.-based firm, is approximately the same s

> Layton Co., a U.S. firm, attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters: where SP represents the percentage change in Layton’s stock price

> Lance Co. is a U.S. company that has exposure to the Swiss franc (SF) and the Danish krone (DK). It has net inflows of SF100 million and net outflows of DK500 million. The present exchange rate of the SF is approximately $0.80, and the present exchange r

> Blades, Inc., has recently decided to establish a subsidiary in Thailand to produce Speedos, its primary roller blades product. In establishing the subsidiary in Blades, Inc. Case Assessment of International Trade Financing in Thailand Thailato acquiring

> Layton Co., a U.S. firm, attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters: where SP represents the percentage change in Layton’s stock price p

> Maine Co., a U.S. firm, measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters: where SP represents the percentage change in Maine’s stock price per quarter, e

> Kopetsky Co. has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm’s overall degree of transaction exposure? Are currency correlations perfectly stable over time? What does your answer i

> Harz Co., a U.S. firm, has an arrangement with a Chinese company in which it purchases products from this supplier every week at the prevailing spot rate, and then sells the products in the United States invoiced in dollars. All of its competition is fro

> Minnesota Co. is a U.S. firm that exports computer parts to Japan. Its main competition is from firms that are based in Japan, which invoice their products in yen. In contrast, Minnesota’s exports are invoiced in U.S. dollars. The prices charged by Minne

> Assume the euro’s spot rate is presently equal to $1.00. All of the following firms are based in New York and are the same size. Although these firms concentrate on business in the United States, their entire foreign operations for this quarter are provi

> Spratt Co. (a U.S. firm) attempts to determine its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters: SP b b e 5 10 1 1 m where SP represents the percentage change in Spratt’s stock pric

> The Hong Kong dollar (HK$) is presently pegged to the U.S. dollar and is expected to remain pegged. Some Hong Kong firms export products to Australia that are denominated in Australian dollars and have no other business in Australia. The exports are not

> Kanab Co. and Zion Co. are U.S. companies of approximately the same size that engage in much business within the United States. Both conduct some international business as well. Kanab Co. has a subsidiary in Canada that will generate earnings of approxim

> You use today’s spot rate of the Brazilian real to forecast the spot rate of the real for one month ahead. Today’s spot rate is $0.4558. Use the VaR method to determine the maximum percentage loss of the Brazilian real over the next month based on a 95 p

> Long-Term Financing Decision by the Sports Exports CompanyThe Sports Exports Company continues to focus on producing footballs in the United States and exporting them to the United Kingdom. Its exports are denominated in pounds, which has continually exp

> The Central Bank of Poland is about to engage in indirect intervention later today, by which it will lower Poland’s interest rates substantially. This will have an impact on the value of the Polish currency (zloty) against most currencies because it will

> Zemart is a U.S. firm that plans to establish an international business in which it will export goods to Mexico (these exports will be denominated in pesos) and to Canada (these exports will be denominated in Canadian dollars) once a month and, therefore

> What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that would reduce transaction exposure.

> Assume that the Mexican peso and the Brazilian currency (the real) have depreciated against the U.S. dollar recently due to the high inflation rates in those countries. Assume that inflation in these two countries is expected to continue and that it will

> Washington Co. and Vermont Co. have no domestic business. Both have a similar dollar equivalent amount of international exporting business. Washington Co. exports all of its products to Canada, whereas Vermont Co. exports its products to Poland and Mexic

> Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is approximately $0.70 and the present exchange rate of the pound is $1.90. Raton Co

> Celtic Co. is a U.S. firm that exports its products to England. It faces competition from many firms in England. Its prices to customers in England have generally been lower than those of the U.K. competitors, primarily because the British pound has been

> In 2016, the United Kingdom decided to leave the European Union (a decision referred to as Brexit). Many analysts have made arguments about how this event will affect firms in the United Kingdom. Assume that the pound’s value relative to the euro is like

> Cornhusker Co. is an exporter of products to Singapore. It wants to know how its stock price is affected by changes in the Singapore dollar’s exchange rate. The firm believes that the impact may occur with a lag of one to three quarters. How could regres

> Recall that Blades, Inc., is considering the establishment of a subsidiary in Thailand to manufacture Speedos, Blades’ primary roller blades product. Alternatively, Blades could acquire an existing manufacturer of roller blades in Thail

> The Walt Disney Company built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate movements? Think carefully before you give your final answer. There is more than one way

> Using the cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and cash flow items would be affected by three possible exchange rate scenarios for the New Zealand dollar ( ) NZ$ : (1) NZ$ $ 5 0.50, (2) NZ$ $

> Vegas Corp. is a U.S. firm that exports most of its products to Canada. Historically, the firm invoiced its products in Canadian dollars to accommodate the importers. However, it was adversely affected when the Canadian dollar weakened against the U.S. d

> a. How can a U.S. company use regression analysis to assess its economic exposure to fluctuations in the British pound? b. In using regression analysis to assess the sensitivity of cash flows to exchange rate movements, what is the purpose of breaking

> Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year: Danish krone inflows equal DK50,000,000, while outflows equal DK40,000,000; British pound inflows equal £2,000,000, w

> Erie Co. has most of its business in the United States, but exports some products to Belgium. Its exports were invoiced in euros (Belgium’s currency) last year. The firm has no other economic exposure to exchange rate risk. Its main competition when sell

> Periodically, rumors swirl that China will weaken its currency (the yuan) against the U.S. dollar and many European currencies. This causes investors to sell stocks in Asian countries such as Japan, Taiwan, and Singapore. Offer an intuitive explanation f

> Cieplak, Inc., is a U.S.-based MNC that has expanded into Asia. Its U.S. parent exports goods to some Asian countries, with its exports denominated in the Asian currencies. It also has a large subsidiary in Malaysia that serves that market. Offer at leas

> Toyota Motor Corp. measures the sensitivity of its exports to the yen exchange rate (relative to the U.S. dollar). Explain how regression analysis could be used for such a task. Identify the expected sign of the regression coefficient if Toyota primarily

> Boulder, Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Boulder not benefit from a stronger euro?

> The Sports Exports Company has considered a variety of projects, but all of its business is still in the United Kingdom. Because most of its business comes from exporting footballs (with revenues being denominated in pounds), it remains exposed to exchan

> Sooner Co. is a U.S. wholesale company that imports expensive, highquality luggage and sells it to retail stores around the United States. Its main competitors also import high-quality luggage and sell it to retail stores. None of these competitors hedge

> Lubbock, Inc., produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the United States. How will Lubbock be affected if Brazil’s currency (the real)

> Longhorn Co. produces hospital equipment. Most of its revenues are in the United States. About half of its expenses require outflows in Philippine pesos (to pay for materials obtained in the Philippines). Most of Longhorn’s competition is from U.S. firms

> Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice their products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if

> Consider a period in which the U.S. dollar weakens against the euro. How will this affect the reported earnings of a U.S.-based MNC with European subsidiaries? Consider a period in which the U.S. dollar strengthens against most foreign currencies. How wi

> Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure?

> Lexington Co. is a U.S.- based MNC with subsidiaries in most major countries. Each subsidiary is responsible for forecasting the future exchange rate of its local currency relative to the U.S. dollar. Comment on this policy. How might Lexington Co. ensur

> Syracuse Corp. believes that future real interest rate movements will affect exchange rates, and it has applied regression analysis to historical data to assess this relationship. It will use regression coefficients derived from this analysis along with

> You are hired as a consultant to assess a firm’s ability to forecast. The firm has developed a point forecast for two different currencies presented in the following table. The firm asks you to determine which currency was forecasted wi

> Explain how to assess performance in forecasting exchange rates. Explain how to detect a bias in forecasting exchange rates.

> Recall that Blades has tentatively decided to establish a subsidiary in Thailand to manufacture roller blades. The new plant will be utilized to produce Speedos, Blades’ primary product. Once the subsidiary has been established in Thailand, it will conti

> Explain the mixed technique for forecasting exchange rates.

> Explain the market-based approach to forecasting exchange rates. What is the rationale for using market-based forecasts? If the euro appreciates substantially against the dollar during a specific period, would market-based forecasts have overestimated or

> The prevailing one-year risk-free interest rate in Argentina is higher than the interest rate in the United States and will continue to be higher over time. Sycamore Co. believes the international Fisher effect can be used to derive the best forecast of

> Assume that interest rate parity exists. The one-year risk-free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in purchasing power parity, and you also believe that Singapore will experience a 2 percent inflat

> Assume that interest rate parity exists and it will continue to exist in the future. Kentucky Co. wants to forecast the value of the Japanese yen in one month. The Japanese interest rate is lower than the U.S. interest rate. Kentucky Co. will use either

> Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40, whereas the spot rate of the Japanese yen was $0.01. At that time, the one-year interest rate of the euro and the Japanese yen was 3 percent, compared to 7 percen

> Explain the fundamental approach to forecasting exchange rates. What are some limitations of using a fundamental technique to forecast these rates?

> Assume that interest rate parity exists. Today the one-year U.S. interest rate is equal to 8 percent, whereas Mexico’s one-year interest rate is equal to 10 percent. Today the two-year annualized U.S. interest rate is equal to 11 percent, whereas the two

> Assume that interest rate parity exists, and that it will continue to exist in the future. Assume that interest rates of the United States and the United Kingdom vary substantially in many periods. You expect that interest rates at the beginning of each

> Purdue Co. (based in the United States) exports cable wire to Australian manufacturers. It invoices its product in U.S. dollars and will not change its price over the next year. There is intense competition between Purdue and the local cable wire produce

> The Sports Exports Company produces footballs in the United States and exports them to the United Kingdom. It also has an ongoing joint venture with a British firm that produces some sporting goods for a fee. The Sports Exports Company is considering the

> New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. interest rate is 4 percent, regardless of the debt matu

> For all parts of this question, assume that interest rate parity exists, that the prevailing one-year U.S. nominal interest rate is low, and that you expect U.S. inflation to be low this year. a. Assume that the country Dinland engages in much trade wit

> Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 percent. The spot rate of Bolivia’s currency (called th

> The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar. The values of Latin American currencies have generally declined substantially against the dollar over time.

> The treasurer of Glencoe, Inc., detected a forecast bias when using the 30-day forward rate of the euro to forecast future spot rates of the euro over various periods. He believes he can use this information to determine whether imports ordered every wee

> The September 11, 2001, terrorist attacks on the United States were quickly followed by lower interest rates in the United States. How would this affect a fundamental forecast of foreign currencies? How would this affect the forward rate forecast of fore

> You must determine whether there is a forecast bias in the forward rate. You apply regression analysis to test the relationship between the actual spot rate and the forward rate forecast (F ): The regression results are as follows Based on these results

> Explain the technical approach to forecasting exchange rates. What are some limitations of using technical forecasting to predict these rates?

> Assume that the following regression model was applied to historical quarterly data: Assume that the regression coefficients were estimated as follows: Also assume that the inflation differential in the most recent period was 3 percent. The real intere