Exam 8: Management of Transaction Exposure

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00.The annual interest rate is 3 percent in Japan and 6 percent in the United States.XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.The future dollar cost of meeting this obligation using the money market hedge is

An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of

An exporter can share exchange rate risk with their customers by

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Estimate the cost today of an options strategy that will eliminate exchange rate risk. Listed Options Strike Puts Calls Euro 62,500 \ 1.25=1.00 \ 0.0075 per \ 0.01 per Yen ¥12,500,000 \ 1.00=\pm100 \ 0.0075 per ¥100 \ 0.01 per ¥100

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (in Swiss francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. Spot exchange rates 1 -year Forward Rates Contract size \ 1.20=1.00 \ 1.25=1.00 62,500 \ 1.00= \ 1.00=120 2,500,000 The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge his exchange rate risk.Have an estimate of how many contracts of what type.

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Interest rates are 3% in €,2% in $ and 4% in £. Detail a strategy using spot exchange rates and borrowing or lending that will hedge your exchange rate risk.

Your firm is a Swiss importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc-denominated payable with a one-year maturity. The following were computed without rounding.Select the answer closest to yours.

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

Simplify the following set of intra company cash flows for this Swiss Firm. Consider the following exchange rates. £1.00 =\ 2.00 1.00 =\ 1.60 SFr 1.00 =\ 0.50

Simplify the following set of intra company cash flows for this Swiss Firm. Consider the following exchange rates.

On a recent sale,Boeing allowed British Airways to pay either $18 million or £10 million.

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00.The annual interest rate is 3 percent in Japan and 6 percent in the United States.XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.Assume that the forward rate is the best predictor of the future spot rate.The future dollar cost of meeting this obligation using the option hedge is

Transaction exposure is defined as

In evaluating the pros and cons of corporate risk management,one argument against hedging is

Your firm is an Italian importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an American firm for $1,000,000 worth of bicycles.Payment from the American firm (in U.S.dollars)is due in six months.Detail a strategy using futures contracts that will hedge your exchange rate risk.

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.Step one: 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. Step two: ABC is considering implementing a hedging program that will eliminate their exchange rate risk: they will make a certain $15 million whether or not the dollar appreciates or depreciates.How much will they save in taxes if they implement the program?

With any hedge