Finance
FINC6013 Workshop 6 Questions & Solutions
Chapter 3
PROBLEMS
6. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in connection with a shipment of computer chips that Sony is purchasing from Intel. Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that the dollar will weaken by 1% over the next 90 days, and that the standard deviation of 90-day forecasts of the percentage rate of depreciation of the dollar relative to the yen is 4%.
a. Provide a qualitative description of Intel’s transaction exchange risk.
Answer: Intel is a U.S. company, and it is scheduled to receive yen in the future. A weakening of the yen versus the dollar causes a given amount of yen to convert to fewer dollars in the future. This loss of value could be severe if the yen depreciates by a significant amount.
b. If Intel chooses not to hedge its transaction exchange risk, what is Intel’s expected dollar revenue?
Answer: If Intel chooses not to hedge, the expected dollar revenue is the expected dollar value of the ¥100,000,000. The expected spot rate incorporates a 1% weakening of the dollar. This means that the expected yen price of the dollar is 1% less than the current spot rate of ¥103/$ or Et[S(t+90,¥/$)] = 0.99 [pic]¥103/$ = ¥101.97/$ Hence, Intel expects to receive ¥100,000,000 / ¥101.97/$ = $980,681
c. If Intel does not hedge, what is the range of possible dollar revenues that incorporates 95.45% of the possibilities?
Answer: We are told that the standard deviation of the rate of depreciation of the dollar is 4%. The standard deviation of the future spot rate is therefore 4% of the current spot rate or 0.04 [pic]¥103/$ = ¥4.12/$. Thus, plus or minus 2 standard deviations around the conditional expected future spot rate is ¥101.97/$ + ¥8.24/$ = ¥110.21/$ ¥101.97/$ - ¥8.24/$ = ¥93.73/$ The range that encompasses 95.45% of possible future values for Intel’s receivable is
Chapter 3
PROBLEMS
6. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in connection with a shipment of computer chips that Sony is purchasing from Intel. Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that the dollar will weaken by 1% over the next 90 days, and that the standard deviation of 90-day forecasts of the percentage rate of depreciation of the dollar relative to the yen is 4%.
a. Provide a qualitative description of Intel’s transaction exchange risk.
Answer: Intel is a U.S. company, and it is scheduled to receive yen in the future. A weakening of the yen versus the dollar causes a given amount of yen to convert to fewer dollars in the future. This loss of value could be severe if the yen depreciates by a significant amount.
b. If Intel chooses not to hedge its transaction exchange risk, what is Intel’s expected dollar revenue?
Answer: If Intel chooses not to hedge, the expected dollar revenue is the expected dollar value of the ¥100,000,000. The expected spot rate incorporates a 1% weakening of the dollar. This means that the expected yen price of the dollar is 1% less than the current spot rate of ¥103/$ or Et[S(t+90,¥/$)] = 0.99 [pic]¥103/$ = ¥101.97/$ Hence, Intel expects to receive ¥100,000,000 / ¥101.97/$ = $980,681
c. If Intel does not hedge, what is the range of possible dollar revenues that incorporates 95.45% of the possibilities?
Answer: We are told that the standard deviation of the rate of depreciation of the dollar is 4%. The standard deviation of the future spot rate is therefore 4% of the current spot rate or 0.04 [pic]¥103/$ = ¥4.12/$. Thus, plus or minus 2 standard deviations around the conditional expected future spot rate is ¥101.97/$ + ¥8.24/$ = ¥110.21/$ ¥101.97/$ - ¥8.24/$ = ¥93.73/$ The range that encompasses 95.45% of possible future values for Intel’s receivable is