A. Albany Corp. is a U.S. based MNC that has a large government contract with Australia. The contract will continue for several years and generate more than half of Albany's total sales volume. The Australian government pays Albany in Australian dollars. About B. percent of Albany's oper¬ating expenses are in Australian dollars; all other expenses are in U.S. dollars. Explain how Albany Corp. can reduce its economic exposure to exchange rate fluctuations.
C. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?
D. List the factors that affect currency call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assuming the expiration date and the total dollar value represented by each option are the same for both options)?
E. Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Mike's net profit on the call option?
F). What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward con¬tract on euros to hedge its exposure in euros? Explain why an MNC use forward contracts to hedge committed transactions and use currency options to hedge contracts that are anticipated but not committed. Why might forward contracts be advantageous for committed transactions, and currency options be advantageous for anticipated transactions?
G). A U.S. professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a check for 1 million pounds. The team antici¬pates that the pound will depreciate substantially by the scheduled date of the game. In addition, the National Foot-ball League must approve the deal, and approval (or disa¬pproval) will not occur for three months. How can the team hedge its position? What is there to lose by waiting three months to see if the exhibition game is approved before hedging?
H). The Swiss Central Bank bans the use of Swiss francs for Eurobond issues. Explain how currency swaps can be used to enable foreign borrowers who want to raise Swiss Francs through a bond issue outside of Switzerland to get around this ban.
I). Explain the economic advantages of swap agreements.