1. Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% mark up for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?
a. £27,363
b. £55,000
c. £22,803
d. £25,581
2. Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. The spot exchange rate is $1.250/euro. The six month forward rate is $1.22/euro. CVT's cost of capital is 11%. The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months). The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months). The U.S. 6-month borrowing rate is 8% (or 4% for 6 months). The U.S. 6-month lending rate is 6% (or 3% for 6 months). December call options for euro 750,000; strike price $1.28, premium price is 1.5%. CVT's forecast for 6-month spot rates is $1.27/euro. The budget rate, or the highest acceptable purchase price for this project, is $3,900,000 or $1.30/euro. If CVT locks in the forward hedge at $1.22/euro, and the spot rate when the transaction was recorded on the books was $1.25/euro, this will result in a "foreign exchange accounting transaction ________ of ________.
a. loss; $90,000.
b. loss; €90,000.
c. gain; €90,000.
d. gain; $90,000.