international business finance questions
FINS3616 International Business Finance - Week 4
A. Conceptual questions
1. What is a forward exchange rate?
2. If the yen is selling at a premium relative to the euro in the forward market, is the forward price of EUR per JPY larger or smaller than the spot price of EUR per JPY?
3. If you are a U.S. firm and owe someone ¥10,000,000 in 180 days, what is your transaction exchange risk?
4. If the spot exchange rate of the yen relative to the dollar is ¥105.75, and the 90-day forward rate is ¥103.25/$, is the dollar at a forward premium or discount? Express the premium or discount as a percentage per annum for a 360-day year?
5. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in connection with a shipment of computer chips that Sony is purchasing from Intel. Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that the dollar will weaken by 1% over the next 90 days.
(1) Provide a qualitative description of Intel’s transaction exchange risk.
(2) If Intel chooses not to hedge its transaction exchange risk, what is Intel’s expected dollar revenue?
6. A firm based in the United Kingdom has promised to pay bondholders £10,000 in one year. The firm will be worth either £9,000 or £19,000 with equal probability at that time depending on the value of the dollar. The firm will be worth £14,000 if it hedges against currency risk.
a.Identify the values of debt and equity under unhedged and hedged scenarios assuming there are no costs of financial distress.
b.Suppose the firm will incur direct bankruptcy costs of £1,000 in bankruptcy. Identify the value of debt and of equity under both unhedged and hedged scenarios.
c.In addition to the £1,000 direct bankruptcy cost, suppose indirect costs reduce the asset value of the firm to either £6,000 or £18,000 (before the £1,000 direct bankruptcy cost) with equal probability. Hedging results in firm value of
A. Conceptual questions
1. What is a forward exchange rate?
2. If the yen is selling at a premium relative to the euro in the forward market, is the forward price of EUR per JPY larger or smaller than the spot price of EUR per JPY?
3. If you are a U.S. firm and owe someone ¥10,000,000 in 180 days, what is your transaction exchange risk?
4. If the spot exchange rate of the yen relative to the dollar is ¥105.75, and the 90-day forward rate is ¥103.25/$, is the dollar at a forward premium or discount? Express the premium or discount as a percentage per annum for a 360-day year?
5. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in connection with a shipment of computer chips that Sony is purchasing from Intel. Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that the dollar will weaken by 1% over the next 90 days.
(1) Provide a qualitative description of Intel’s transaction exchange risk.
(2) If Intel chooses not to hedge its transaction exchange risk, what is Intel’s expected dollar revenue?
6. A firm based in the United Kingdom has promised to pay bondholders £10,000 in one year. The firm will be worth either £9,000 or £19,000 with equal probability at that time depending on the value of the dollar. The firm will be worth £14,000 if it hedges against currency risk.
a.Identify the values of debt and equity under unhedged and hedged scenarios assuming there are no costs of financial distress.
b.Suppose the firm will incur direct bankruptcy costs of £1,000 in bankruptcy. Identify the value of debt and of equity under both unhedged and hedged scenarios.
c.In addition to the £1,000 direct bankruptcy cost, suppose indirect costs reduce the asset value of the firm to either £6,000 or £18,000 (before the £1,000 direct bankruptcy cost) with equal probability. Hedging results in firm value of