Currency Put Option Premiums Hedging with Currency Put Options Speculating with Currency Put Options Contingency Graphs for Currency Options Conditional Currency Options European Currency Options How the Use of Currency Futures and Options Contracts Affect an MNC’s Value Chapter Theme This chapter provides an overview of currency derivatives‚ which are sometimes referred to as “speculative.” Yet‚ firms are increasing their use of these instruments for hedging. The chapter does give speculation
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Solution to ch 7 Answers to End of Chapter Questions 1. Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. ANSWER: Locational arbitrage can occur when the spot rate of a given currency varies among locations. Specifically‚ the ask rate at one location must be lower than the bid rate at another location. The disparity in rates can occur since information is not always immediately available to all banks. If a disparity does exist‚ locational
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company needs to keep in mind the exchange rate between Mexican Pesos and Euros‚ as well as the inflation rates over time and the risks involved with this type of investment. Indeed‚ a major challenge for the analysis will be deciding which currency to use between the Euro and the peso. Scenario #1: Mexican Inflation = 7% Given the fact that the expected future inflation is 7% for Mexico and 3% for France. The discount rate used for the Peso NPV can be calculated using the equation for the International
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1. USD - The currency Jaguar is most exposed to has been the US Dollar (USD). Appendix item 1 shows that Jaguar historically (1984-1989) has a large proportion of retail vehicle unit sales and thus turnover generated from the United States. CAD and DM -To a much lesser extent‚ Jaguar has also had revenues driven from sales into Canada (5-7% of revenues) and Europe (6-14% of revenues)‚ although it is not clear from case data to which Euopean country the Jaguars have been exported. NB. This is pre-Euro
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Company Overview As one of the largest retail companies in South America and the largest in Chile‚ Cencosud has transformed itself from a self-service supermarket back in 1962 to a multi-format retailer with 1009 stores across Latin America today. It operates through different store formats including supermarkets (Jumbo)‚ home improvements (Easy)‚ shopping centers (Santa Isabel)‚ financial services (Costanera Center) and department stores (Paris). Today‚ it’s also the most profitable retailer in
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23/E c. Sell Euro forward at $1.185/E d. Sell dollars forward at $1.21/E e. Buy Euro forward at $1.185/E 2. If the Bid-Offer at maturity is $1.17/E and $1.19/E (assume the bank is following the same quote convention)‚ have you made or lost money by hedging‚ and how much have you made or lost? Explain why. a. Loss < $1200 b. Loss > $1200 c. Profit 500 E d. Profit < $1200 e. Profit > $1200 3. If the average of the Bid-Offer is the spot‚ which currency is expected to depreciate‚ and by how much‚ over
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Midterm – John Doe Executive summary Diva shoes is an international shoes company that is experiencing rapid growth. Due to this rapid growth‚ the company never established a robust hedging strategy to protect itself against fluctuations of the multiple currencies it engages with. This situation became more severe in Japan. The company’s growth in Japan exceeded all expectations‚ and unlike other countries in which the company conducted business (Italy for example) the company had almost no expenses
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pounds of honey annually. The world supply of honey has decreased by about 20%. Currently‚ the company pays $1.08 per pound for the Chinese-Canadian blend honey. Harrington Honey provided UR with three alternative sources of honey: 1. Canadian-Argentinean blend a. Cost: $1.42 million (a 31% cost increase). b. Customers may reject because flavor is significantly different from current honey blend. c. Argentina is world’s third-largest honey supplier. 2. 100% Canadian honey a. Cost: $1.75 million (a
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converted into euros and invested at the German interest rate‚ with the euro maturity value sold forward. In this case the dollar maturity value will be $105‚590‚909 Clearly‚ it is better to invest $100‚000‚000 in Germany with exchange risk hedging. 2. While you were visiting London‚ you purchased a Jaguar for £35‚000‚ payable in three months. You have enough cash at your bank in New York City‚ which pays 0.35% interest per month‚ compounding monthly‚ to pay for the car. Currently‚ the spot
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Chapter 4 2. Inflation Effects on Exchange Rates. Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal‚ how should this affect the (a) U.S. demand for Canadian dollars‚ (b) supply of Canadian dollars for sale‚ and (c) equilibrium value of the Canadian dollar? ANSWER: Demand for Canadian dollars should increase‚ supply of Canadian dollars for sale should decrease‚ and the Canadian dollar’s value should increase. 3. Interest Rate Effects on
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