Blade Chap 4
458 Part 4: Long-Term Asset and Liability Management
Consequently, Burton received only 6 million Swiss francs at the end of the year. Also assume that the spot rate of the franc at the end of the year was $.79. Determine the net present value of this project for Burton Co. if these conditions occur.
31. Hedge Decision on a Project. Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in 1 year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk-averse and only takes risk when the potential benefits outweigh the risk. It has no other international business, and is considering various methods to hedge its exchange rate risk. Assume that interest rate parity exists. Carlotto Co. recognizes that exchange rates are very difficult to forecast with accuracy, but it believes that the l-year forward rate of the pound yields the best forecast of the pound's spot rate in 1 year. Today the pound's spot rate is $2.00, while the I-year forward rate of the pound is $l.90. Carlotto Co. has determined that a forward hedge is better than alternative forms of hedging. Should
Carl otto Co. hedge with a forward contract or should it remain unhedged? Briefly explain.
32. NPV of Partially Hedged Project. Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an
BLADES, INC. CASE initial outlay of $1 million for the research and development of this equipment. It expects to receive 600,000 euros in 1 year from selling the products in Portugal where it already does much business. In addition, it also expects to receive
300,000 euros in 1 year from sales to Spain, but these cash flows are very uncertain because it has no existing business in Spain.
Consequently, Burton received only 6 million Swiss francs at the end of the year. Also assume that the spot rate of the franc at the end of the year was $.79. Determine the net present value of this project for Burton Co. if these conditions occur.
31. Hedge Decision on a Project. Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in 1 year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk-averse and only takes risk when the potential benefits outweigh the risk. It has no other international business, and is considering various methods to hedge its exchange rate risk. Assume that interest rate parity exists. Carlotto Co. recognizes that exchange rates are very difficult to forecast with accuracy, but it believes that the l-year forward rate of the pound yields the best forecast of the pound's spot rate in 1 year. Today the pound's spot rate is $2.00, while the I-year forward rate of the pound is $l.90. Carlotto Co. has determined that a forward hedge is better than alternative forms of hedging. Should
Carl otto Co. hedge with a forward contract or should it remain unhedged? Briefly explain.
32. NPV of Partially Hedged Project. Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an
BLADES, INC. CASE initial outlay of $1 million for the research and development of this equipment. It expects to receive 600,000 euros in 1 year from selling the products in Portugal where it already does much business. In addition, it also expects to receive
300,000 euros in 1 year from sales to Spain, but these cash flows are very uncertain because it has no existing business in Spain.