use the forward market to hedge this risk. ANSWER: The Sports Exports Company is exposed to exchange rate risk‚ because the value of the British pound will change over time. If the pound depreciates over time‚ the payment in pounds will convert to fewer dollars. The Sports Exports Company could engage in a forward contract in which it would sell pounds forward in exchange for dollars. For example‚ if it anticipated receiving a payment in pounds 30 days from now‚ it could negotiate a forward contract
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Research sold a super computer to the Max Planck Institute in Germany on credit and invoiced €10 million payable in six months. Currently‚ the six-month forward exchange rate is $1.10/€ and the foreign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.05/€ in six months. (a) What is the expected gain/loss from the forward hedging? The expected gain from this sale can be figured by using this equation: 10‚000‚000(1.10-1.05)=10‚000‚000(.05)=$500‚000 expected
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Merton Electronics Case Study 1) Merton Electronics is subject to transaction exposure. Transaction exposure is the gains or losses realized from the settlement of specific transactions that are denominated in a foreign currency. There are two main types of transaction exposure: 1) Purchasing or selling on credit goods denominated in a foreign currency 2) Borrowing or lending funds when repayments is going to be made in foreign currency. In respects to Merton’s Yen payments they are subject
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896N1 THE UNIVERSITY OF SUSSEX MSc EXAMINATION 2011/12 SAMPLE – MOCK EXAMINATION Multinational Financial Management Date Time Student number This exam paper is divided into three parts: Part A: multiple-choice questions (answer sheet on page 2 of this document) Part B: calculation question Part C: questions requiring short written answers Duration: 2.0 hours University approved calculators are permitted Write your student number on this document and submit it with the answer book
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which indicates that to balance our risk we would need to consider a short position with respect to the Yen. Over the next three months‚ the market expects to see the yen appreciating again the dollar and is offering forward rates that are in line with this expectation. These forward rates would put Tiffany in another long position which would not hedge against our exchange risks. Our next option to hedge against any ForEx
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most appropriate strategy to be used in hedging the transaction exposures. Choose between: i. Forward market hedge ii. Money market hedge iii. Options hedging Strategy 1: hedging using forward contract Because Hogan will receive AUD in 6-months‚ their concern is that they’ll have to convert the AUD to less USD. 1) Today‚ Hogan buys a forward contract to sell AUD (they’ll receive in 6 months) at locked forward rate of AUD 2.805/£ 2) At t=6‚ Hogan will receive AUD 28 million 3) Hogan sells this AUD28
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the majority of its revenues in deutsche marks). The exposure was the result of this money being due in one year - upon delivery of the aircraft. He was considering four alternatives to deal with this risk: 1) do nothing‚ 2) hedge using forward contracts‚ 3) hedge using options‚ or 4) use the money market to lock in current exchange rates. Due to the restrictive covenants on Lufthansa ’s borrowing‚ the fourth option was not a viable alternative. Based on the above synopsis and the
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value continued to deteriorate. Since Orange has net cash flows in baht resulting from its exports to Thailand‚ a deterioration in the baht’s value will affect the company negatively. Dan Kant‚ Orange’s CFO‚ would like to ensure that the spot and forward rates Orange’s bank has quoted are reasonable. If the exchange rate quotes are reasonable‚ then arbitrage will not be possible. If the quotations are not appropriate‚ however‚ arbitrage may be possible. Under these conditions‚ Kant would like Orange
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(i) borrow the present value of USD (ii) convert the USD to AUD in spot market (this allows you to know how much AUD you will get for the receivable‚ therefore hedged) (iii) The future value of this AUD is equivalent to the USD receivable‚ an implied forward rate is obtained. (b) To hedge import payable in USD (i) borrow AUD (pay AUD interest rate) (ii) convert the AUD in spot to USD (iii) invest the USD to earn USD interest. This will
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hedge its receivables / payables by 100%. Perhaps the issue is related to high costs of using options and their receivables / payables run into huge amounts. Additionally‚ GM is not keen on committing to a forward because they have positive expectations about the future exchange rate and the forward would only serve to limit their possible gains. Inherency: Does the plan exist in the status quo (the way things are now)
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