Exam 13: International Equity Markets

Fashion Shoes Inc.manufactures its shoes in Milano,Italy.The company just received an order from the United States for USD 1 million to be received in one year.The current spot rate is EUR 1 /USD and the 1 year forward rate is EUR 1.01/USD.The current interest rates are 4% in the United States and 5% in Italy.A call option on the US dollar is available with a strike price of EUR 1.01/USD and a premium of EUR 0.03 and a put option is available with a strike price of EUR 1/USD and a premium of EUR 0.025/USD.Determine the net proceeds from a forward hedge and an options hedge.Which option should Fashion Shoes use?

ABC Inc.,an exporting firm,expects to earn $20 million if the dollar depreciates,but only $10 million if the dollar appreciates.Assume that the dollar has an equal chance of appreciating or depreciating.Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000. Corporate income tax rate = 30% for earnings exceeding $7,500,000.

Encana Inc,a Canadian firm has a US dollar receivable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is false?

The future dollar cost of meeting this obligation using the forward hedge is:

All of the following financial contracts may be used to hedge transaction exposure

The steps involved in a money market hedge for a foreign currency payable of a Canadian firm are in order:

Encana Inc,a Canadian firm has a US dollar payable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is false?

Which of the following is a financial hedge?

The most direct and popular way of hedging transaction exposure is by:

Which of the following is not an operational hedge?

Assume that Boeing sells a currency forward contract of £10 million for delivery in one year,in exchange for a given amount of U.S.dollar.Which of the following is all true? On the maturity date of the contract Boeing will (i)- have to deliver £10 million to the bank (the counterparty of the contract) (ii)- take delivery of $14.6 million (iii)- have a zero net pound exposure (iv)- have a profit,or a loss,depending on the future changes in the exchange rate,from this British sale

The steps involved in a money market hedge for a foreign currency receivable of a Canadian firm are in order:

The future dollar amount of this receivable using the forward hedge is:

Transaction exposure is defined as:

Soleil Inc.,a French manufacturer of sunscreen,has agreed to sell sunscreen to a Danish retailer for 2 million Danish kroner to be received in 180 days.The current spot rate is DKR5.02/EUR and the 180-day forward rate is DKR5.23/EUR.The current interest rates are 5% in Denmark and 4% in France.Should the firm use a forward hedge or a money market hedge?

Suppose that on the maturity date of the forward contract,the spot rate turns out to be $1.40/£ (i.e.less than the forward rate of $1.46/£).Which of the following is true?

In evaluating the pros and cons of corporate risk management,"market imperfections" refer to:

Pile-of-Bones Inc.,headquartered in Regina,just bought snowblowers for US $ 100,000 to be paid in 90 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Pile-of-Bones Inc.You check with your banker and find out the following: The current spot rate is C$ 1.35/US$ and the 90-day forward rate is C$1.36/US$.The interest rates are 5% in the United States and 6% in Canada. a)What are the net payables if Pile-of-Bones uses a forward hedge? b)What are the net payables if Pile-of-Bones uses a money market hedge? c)Which type of hedge should Pile-of-Bones use?

The future dollar amount of this receivable using the money market hedge is:

Sonnenschein A.G.You check with your banker and find out the following: The spot bid and ask rates are USD 1.1001/EUR and USD 1.0953/EUR respectively and the 120-day forward rates are EUR 0.8850/USD and EUR 0.8950/USD.Determine the net payables if Sonnenschein uses a forward hedge to manage its payables. US$ 100,000*0.8950 = EUR 89,500 A.G., a German retailer of solar panels just bought panels for US $ 100,000 to be paid in 120 days.As the financial manager, you are responsible for making a recommendation on the best hedging choice available to Sonnenschein