1. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for ? 1,250,000.
The sale 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, Plains States is considering several hedging alternatives for its receivables 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 $1.1740
- The six month forward rate is $1.1480
- Plains States' cost of capital is 12% per annum
- The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
- The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
- The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
- The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
- December put options for ?625,000; strike price $1.18, premium price is 1.5%
- Plains States' forecast for 6-month spot rates is $1.19/?
- The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/?
What is the cost of a put option hedge for Plains States' Euro receivable contract?
(Hint: What is the total premium cost in 6 months? Don't forget the time value of money.)
$23,296
$25,800
$22,013
$21,045
2. A U.S. firm with no subsidiaries presently has sales to Brazil amounting to R200 million, while its Real -denominated expenses amount to R100 million. If it shifts its material orders from its Brazilian suppliers to U.S. suppliers, it could reduce Real-denominated expenses by R20 million and increase dollar-denominated expenses by $15 million.
This strategy would _______ the firm's exposure to changes in the Real's movements against the U.S. dollar.
Regardless of whether the firm shifts expenses, it is likely to perform better when the Real is valued _______ relative to the dollar.
reduce; high reduce;low increase; low increase; high
3. A US exporter is concerned about the depreciation of JPY against USD due to JPY receivables of JPY400,000,000 on February 1st ( in 167 days). To hedge (protect himself/herself) the position, exporter decides to use futures markets. Currently CME (Chicago Mercantile Exchange) JPY contracts (12,500,000 each) with closest maturity are traded at USD0.8350 per 100 JPY.
Futures contract expires 18 days after on February 19th.
Suppose the exporter takes a futures position equal to 50% of its cash position (JPY200m) at USD0.8350. Also Company treasurer buys an over the counter put option for the JPY150m portion of the expected cash inflow at a strike price of JPY120/$, at 2% (2% is the cost of premium) and leaves JPY50m portion of the exposure uncovered. At the time the option was purchased, the spot rate was JPY117/$. On February 1st, Futures contract price is USD0.8130 per 100 JPY and the JPY per $ spot price is 122.
Calculate the effective amount of USD company will clear on February 1st.
What is the effective JPY cost of acquiring one USD?
4,321,477
5,236,477
3,317,539
None of the above
4. Brimmo Motorcycles Inc., a U.S.-based firm, manufactures and sells electric motorcycles both domestically and internationally.
A sudden and unexpected appreciation of the U.S. dollar should allow sales to ________ at home and ________ abroad. (Assume other factors remain unchanged.)
decrease; decrease
increase; increase
decrease; increase
increase; decrease