Question: Under what conditions would Zona Co.’s

> Today the spot rate of the euro is $1.20 and the oneyear forward rate is $1.16. A one-year call option on euros exists with a premium of $0.04 per unit and an exercise price of $1.17. You think the spot rate is the best forecast of future spot rates. You

> San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also need to pay 5 million Swiss francs for imports arrivin

> Rebel Co. (a U.S. firm) has a contract with the government of Spain and will receive payments of 10,000 euros in exchange for consulting services at the end of each of the next 10 years. The annualized interest rate in the United States is 6 percent rega

> Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-yearinterest rate in the United States. You use the international Fisher effect when forecasting how exchange rates will change over the next year.

> Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing funds. The one-year Swiss interest rate is 9 percent wh

> Each month, the Sports Exports Company (a U.S. firm) receives an order for footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds, as requested by the British distributor. Jim Logan, ow

> Assume that interest rate parity exists. The annualized interest rate is presently 5 percent in the United States for any term to maturity and is 13 percent in Mexico for any term to maturity. Dokar Co. (a U.S. firm) has an agreement under which it will

> Visor, Inc. (a U.S. firm), has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argentina is 19 percent, versus 6 percent in the United Stat

> Explain how a U.S. corporation could hedge net receivables in euros with futures contracts. Explain how a U.S. corporation could hedge net payables in Japanese yen with futures contracts

> You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United States is 7 percent, and the one-year interest rate in S

> Refer to the previous problem. Assume that Brooks believes the cost of a long straddle is too high. However, call options with an exercise price of $0.105 and a premium of $0.002 and put options with an exercise price of $0.09 and a premium of $0.001 are

> Brooks, Inc., imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $0.10. Brooks just purchased wood for 2 million dirham and should pay for the wood in three months. It i

> Marson, Inc., has some customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the Canadian dollar is $0.75. Two call options on Canadian dollars are available. The first option has an exercise

> Evar Imports, Inc., buys chocolate from Switzerland and resells it in the United States. It just purchased chocolate invoiced at SF62,500; payment for the invoice is due in 30 days. Assume that the current exchange rate of the Swiss franc is $0.74. Also

> Assume interest rate parity exists. Today the one-year interest rate in Canada is the same as the one-year interest rate in the United States. Utah Co. uses the forward rate to forecast the future spot rate of the Canadian dollar that will exist in one y

> Red River Co. (a U.S. firm) purchases imports that have a price of 400,000 Singapore dollars; it has to pay for the imports in 90 days. The firm will use a 90-day forward contract to cover its payables. Assume that interest rate parity exists. This morni

> Ever since Jim Logan began his Sports Exports Company, he has been concerned about his exposure to exchange rate risk. The firm produces footballs and exports them to a distributor in the United Kingdom, with the exports being denominated in British poun

> Tampa Co. will build airplanes and export them to Mexico for delivery in three years. The total payment to be received in three years for these exports is 900 million pesos. Today the peso’s spot rate is $0.10. The annual U.S. interest rate is 4 percent,

> Denver Co. is about to order supplies from Canada that are denominated in Canadian dollars (C$). It has no other transactions in Canada and will not have any other transactions in the future. The supplies will arrive in one year, at which time payment wi

> Indiana Co. expects to receive 5 million euros in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the euro as of today is $1.10. Interest rate parity exists. Indiana Co. uses the forward rate as a predicto

> Why should an MNC identify net exposure before hedging?

> Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HK$) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against the U.S. dollar and is presently worth $0.03. Virginia C

> You apply a regression model to annual data in which the annual percentage change in the British pound is the dependent variable, and INF (defined as annual U.S. inflation minus U.K. inflation) is the independent variable. A regression analysis produces

> Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables at this time. However, in three months, it will be able

> You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent, whereas the nominal annualinterest rate in the United States is 3 percent. You expect that annual inflation will be about 4 percent in Mexico and 5 percent i

> As treasurer of Tempe Corp., you are confronted with the following problem. Assume the one-year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in one year. A one-year put option is available; it has an exercise price of

> If you were a U.S. importer of products from Europe, explain whether a weak U.S. economy would cause you to hedge your payables (denominated in euros) due a few months later if you expected that the weak economy would cause a major reduction in U.S. inte

> Recall from Chapter 20 that the new Thailand subsidiary of Blades, Inc., received a one-time order from a customer for 120,000 pairs of Speedos, Blades’ primary product. There is a six-month lag between the time when Blades needs funds to purchase materi

> SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by de

> Assume that Carbondale Co. expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is $0.60. The one-year forward rate of the Singapore dollar is $0.62. Carbondale created the following probability distribution for the fu

> Describe how a crisis in Asia could reduce the cash flows of a U.S. firm that exports products (denominated in U.S. dollars) to Asian countries. How could a U.S. firm that exports products (denominated in U.S. dollars) to Asia insulate itself from any cu

> Because Obisbo, Inc., conducts much business in Japan, it is likely to have cash flows in yen that will periodically be remitted by its Japanese subsidiary to the U.S. parent. What are the limitations of hedging these remittances one year in advance over

> Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7 percent over 180 days, and the spot rate of the Mexican peso is $0.10. Suggest how the U.S. firm could implement a money market hedge. Be prec

> St. Louis, Inc., which relies on exporting, denominates its exports in pesos and receives pesos every month. It expects the peso to weaken over time. St. Louis recognizes the limitations of monthly hedging. It also recognizes that it could eliminate its

> Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer network systems to the United Kingdom (denominated in British pounds) and oth

> Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed

> 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.

> 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

> Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales, if there are any) over the next year. Ignore any tax effects. Each firm has the same level of expec

> 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