Exam Review
FNCE 404 Exam Review – Fall2012
Prof. Eloisa Perez
Q1. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment applications in many other industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Ghana for 10,000,000 cedis, payable in six months. Micca’s cost of capital is 12%.
Assumptions
Values Shipment of phosphates from Ghana, Ghanaian cedis 10,000,000 Micca's cost of capital (WACC)
12%
Spot exchange rate, cedis/$
1.90
Six-month forward rate, cedis/$
1.95
Expected spot exchange rate in 6 months, cedis/$ 2.00 Options on Ghanaian cedis:
Call Option
Put Option Strike price, cedis/$
2.00
2.00 Option premium (percent)
2.00%
3.00% United States
Ghana
Six-month interest rate for borrowing (per annum)
4.00%
8.00%
Six-month interest rate for investing (per annum)
2.00%
6.00%
(a) If the company wants to offset their exposure, what options they have? And which one is the best? Why?
Q2. From base price levels of 100 in 2000, Japanese and U.S. price levels in 2003 stood at 102 and 106, respectively.
(a) If the 2000 $:¥ exchange rate was $0.007692, what should the exchange rate be in 2003?
(b) In fact, the exchange rate in 2003 was ¥1 = $0.008696. What might account for the discrepancy? (Price levels were measured using the consumer price index – CPI).
Q3. You are an American investor. Suppose today’s exchange rate is $1.35/€. The six-month interest rates on dollars and euros are 5% and 4% per annum, respectively. The six-month forward rate is $1.3478/€. A foreign exchange advisory service has predicted that the euro will appreciate to $1.3790/€ within six months.
(a) Using $1,000,000 or its equivalent in euros show what would be your arbitrage profit/(loss) per
Prof. Eloisa Perez
Q1. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment applications in many other industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Ghana for 10,000,000 cedis, payable in six months. Micca’s cost of capital is 12%.
Assumptions
Values Shipment of phosphates from Ghana, Ghanaian cedis 10,000,000 Micca's cost of capital (WACC)
12%
Spot exchange rate, cedis/$
1.90
Six-month forward rate, cedis/$
1.95
Expected spot exchange rate in 6 months, cedis/$ 2.00 Options on Ghanaian cedis:
Call Option
Put Option Strike price, cedis/$
2.00
2.00 Option premium (percent)
2.00%
3.00% United States
Ghana
Six-month interest rate for borrowing (per annum)
4.00%
8.00%
Six-month interest rate for investing (per annum)
2.00%
6.00%
(a) If the company wants to offset their exposure, what options they have? And which one is the best? Why?
Q2. From base price levels of 100 in 2000, Japanese and U.S. price levels in 2003 stood at 102 and 106, respectively.
(a) If the 2000 $:¥ exchange rate was $0.007692, what should the exchange rate be in 2003?
(b) In fact, the exchange rate in 2003 was ¥1 = $0.008696. What might account for the discrepancy? (Price levels were measured using the consumer price index – CPI).
Q3. You are an American investor. Suppose today’s exchange rate is $1.35/€. The six-month interest rates on dollars and euros are 5% and 4% per annum, respectively. The six-month forward rate is $1.3478/€. A foreign exchange advisory service has predicted that the euro will appreciate to $1.3790/€ within six months.
(a) Using $1,000,000 or its equivalent in euros show what would be your arbitrage profit/(loss) per