------------------------------------------------- Q1. What gives rise to the currency exposure at AIFS? * Currency exposure is the extent to which the future cash flows of an enterprise‚ arising from domestic and foreign currency denominated transactions involving assets and liabilities‚ and generating revenues and expenses‚ are susceptible to variations in foreign currency exchange rates. * AIFS organizes educational and cultural exchange programs throughout the world. AIFS receives
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Hedging Strategies Using Futures Tutorial 3 - Practice Questions Problem 3.1. Under what circumstances are (a) a short hedge and (b) a long hedge appropriate? A short hedge is appropriate when a company owns an asset and expects to sell that asset in the future. It can also be used when the company does not currently own the asset but expects to do so at some time in the future. A long hedge is appropriate when a company knows it will have to purchase an asset in the future. It can also be used
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Ethan Maldonado IBUS-1305-003 Prof. Siliven 10/24/13 Assignment: Chapter 9 - International Financial Markets Quick Study 1‚ Page 229: 1. What are the three main purposes of the international capital market? Expands the money supply for borrowers – Connects borrowers and lenders in different national capital markets. If a company can’t obtain funds from within its own borders‚ it can seek financing outside them. This is especially a good idea when it comes to firms within nations with small/
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cash flows to changes in exchange rates‚ we believe foreign exchange exposure should be hedged. Question 2. The main issue that should be looked at is how far into the future should WD hedge. Liquid markets for options and futures contracts existed only for maturities of 2 years or less. Even if the problem with forward contracts is similar‚ WD obtained an indication of
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commodity‚ whether used as an input or generated as an output. The price of iron ore falls as a result of a lack of confidence in general economic conditions‚ reducing revenues for an iron ore producer. Credit The risk of another party to a contract not meeting its obligations (i.e. defaulting). A debtors declares bankruptcy‚ resulting in an uncollected receivable. Operational The risk of human or computer error/fraud impacting the financial results of the
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either to purchase a forward contract and lock the cost of the January US$7million or to purchase call options for the USD for $7.5million‚ and which course of action will provide the highest benefit and lowest risk possible under different exchange rates. Should the CAD depreciate with respect to the USD Pixonix costs would be higher. Question #2 Various Hedging Options: a) Purchase a forward contract Cain can eliminate exchange rate risk by engaging in a forward contract by locking in the
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its investment and expansion plans for the future. To attempt the risk of possible exposure of Disney to future fluctuations in the Yen/Dollar sport rate‚ the company can choose to hedge its Yen royalties cash flows. This can be done by using financial instruments to reduce or even entirely eliminate the impact of exchange rates on the cash flows of the Yen royalties. These financial instruments include for example forward contracts‚ futures contracts‚ swaps and options. Besides reducing the
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Management has deduced that it can either employ forward contracts to sell yen for dollars or buy a yen put option. (5) How good are those solutions? Either of these options would allow Tiffany & Co to manage its dollar returns‚ but depending on the anticipated movements of the exchange rate‚ one can be superior to the other. (6) What would you do? I would advise Tiffany and Co to hedge the exchange rate risk using forward contracts. (7) Why would you do that? As there is already
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currencies (Euros and Pounds). AIFS uses currency hedging to protect their bottom line and to cope with changes in exchange rates which can increase cost base and also purchase foreign currency based on projected sales volume because they don’t know what future sales volume will be. In the event of the above risks‚ Tabaczynski considers three alternative strategies with diiferent exchange levels with the price of each hedging strategy incorporated in the calculations. • The AIFS is a company that organises
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exchange rates could increase the cost base.” In order to protect and manage this risk AIFS utilizes hedging contracts in the form of forward and option contracts‚ which are purchased at a minimum of 6 month prior price setting date for the current catalogue. Their business operations give way to another factor that accentuates their currency exposure. Because their hedging contracts start at least 6 months prior to the “main pricing date”‚ their sales volume and expense cover levels forecasted
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