Questions and Answers of International Financial Management 14th

Would any of the hedges you compared in question 2 for the dollars to be received in 90 days require Blades to overhedge? Given Blades’exporting arrangements, do you think it is subject to
In general, do you think it is easier for Blades to hedge its inflows or its outflows denominated in foreign currencies? Why?
Using a spreadsheet, compare the hedging alternatives for the dollar receivables with a scenario under which Blades remains unhedged. Do you think Blades should hedge or remain unhedged?Which hedge
Using a spreadsheet, compare the hedging alternatives for the Thai baht with a scenario under which Blades remains unhedged. Do you think Blades should hedge or remain unhedged? If Blades should
Summarize the results of euros received based on an unhedged strategy, a put option strategy, and a forward hedge strategy. Select the strategy that you prefer based on the information provided.
Determine the amount of euros received by the Sports Exports Company if a forward hedge is used to hedge receivables in one month under each of the two exchange rate scenarios.
Determine the amount of euros received by the Sports Exports Company if a put option is used to hedge receivables in one month under each of the two exchange rate scenarios.
Determine the amount of euros received by the Sports Exports Company if the receivables to be received in one month are not hedged under each of the two exchange rate scenarios.
Evaluating exchange rate movement Find the homepage of a large multinational by referring to the lists on the site http://www.forbes.com and find the latest annual report including all the
40 Hedging decision. You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%. The nominal annual interest rate in the United Kingdom is 6%. You expect that annual
39 Hedging with straddles versus strangles. (See Appendix B.) Refer to the previous problem. Assume that Bach believes the cost of a long straddle is too high. However, call options with an exercise
38 Hedging with straddles. (See the Appendix B.)Bach GmbH (a German company) imports wood from Morocco. The Moroccan exporter invoices in Moroccan dirham. The current exchange rate of the dirham is
37 Hedging with forward versus option contracts.As treasurer of Temple plc you are confronted with the following problem. Assume the one-year forward rate of the US dollar is £0.62. You plan to
36 Hedging with a bear spread. (See the chapter appendix.) Marsden Ltd has customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the
35 Hedging with a bull spread. (See the chapter appendix.) Evar Imports Ltd buys chocolate from Switzerland and resells it in the United Kingdom. It just purchased chocolate invoiced at SFr62
34 Devon Ltd manufactures plastic moulding machines. Annual company sales are £3 million in the UK and £12 million in the rest of Europe (invoiced in euros, average exchange rate £0.60:1 euro).
33 Comparison of techniques for hedging payables.SMU Ltd has future receivables of 4 000 000 New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to
32 Comparison of techniques for hedging receivables.a Assume that Carbondale Ltd expects to receive S$500 000 in one year. The existing spot rate of the Singapore dollar is £0.40. The one-year
31 Hedging during the Asian crisis. Describe how the Asian crisis could have reduced the cash flows of a UK firm that exported products (denominated in British pounds) to Asian countries. How could a
30 Long-term hedging. Since Llancloudy Ltd conducts much business in Japan, it is likely to have cash flows in yen that will periodically be remitted by its Japanese subsidiary to the UK parent. What
29 The long-term hedge dilemma. St Weonards Ltd which relies on exporting, denominates its exports in euros and receives euros every month. It expects the euro to weaken over time. St Weonards
28 Forward hedging. Wedco Technology (UK) exports plastics products to the United States. Wedco decided to price its exports in British pounds. Telematics International plc (of Scotland) exports
27 Hedging payables with currency options. Malibu, Inc. is a US company that imports British goods. It plans to use call options to hedge payables of£100 000 in 90 days. Three call options are
26 Continuous hedging. Cornwall Ltd (UK) purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this UK firm negotiates a three-month
25 Forward hedging. Explain how a Malaysian firm can use the forward market to hedge periodic purchases of UK goods denominated in British pounds. Explain how a French firm can use forward contracts
24 Forward versus options hedge on receivables.You are an exporter of goods to the United States and you believe that today’s forward rate of the US dollar substantially underestimates the future
23 Forward versus options hedge on payables. If you are a US importer of Mexican goods and you believe that today’s forward rate of the peso is a very accurate estimate of the future spot rate, do
22 The cost of hedging. Would Monkton Ltd’s cost of hedging Japanese yen receivables have been positive, negative, or about zero on average over a period in which the British pound unexpectedly
21 Implications of IRP for hedging. If interest rate parity exists, would a forward hedge be more favourable, equally favourable, or less favourable than a money market hedge on euro payables?
20 Forward hedge. Would Devon Ltd’s cost of hedging Australian dollar payables every 90 days have been positive, negative, or about zero on average over a period in which the British pound weakened
19 Hedging with put options. As treasurer of Tupperman(a UK exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250 000 New Zealand dollars 90 days from now. Put
18 Currency diversification. Explain how a firm can use currency diversification to reduce transaction exposure.
17 Cross-hedging. Explain how a firm can use crosshedging to reduce transaction exposure.
16 Leading and lagging. Under what conditions would Zoot Ltd’s subsidiary consider using a ‘leading’ strategy to reduce transaction exposure? Under what conditions would Zoot’s subsidiary
15 Long-term hedging. How can a firm hedge longterm currency positions? Elaborate on each method.
14 Currency options. Can Birstall plc determine whether currency options will be more or less expensive than a forward hedge when considering both hedging techniques to cover net payables in
13 Currency options. Relate the use of currency options to hedging net payables and receivables.That is, when should currency puts be purchased, and when should currency calls be purchased?Why would
12 Forward versus money market hedge on receivables.Assume the following information:Assume that Riverside Ltd (UK) will receive $400 000 in 180 days. Would it be better off using a forward hedge or
11 Forward versus money market hedge on payables.Assume the following information:Assume that Saint Barnabus plc in the UK will need 300 000 ringgit in 90 days. It wishes to hedge this payables
10 Cost of hedging receivables. Assume that Bentley Ltd negotiated a forward contract to sell 100 000 Canadian dollars in one year. The one-year forward rate on the Canadian dollar was £0.55. This
9 Cost of hedging payables. Assume that Suffolk plc negotiated a forward contract to purchase $200 000 in 90 days. The 90-day forward rate was £0.70 to the US dollar. The dollars to be purchased
8 Benefits of hedging. If hedging is expected to be more costly than not hedging, why would a firm even consider hedging?
7 The cost of hedging payables. Assume that Loras(UK) Ltd imported goods from New Zealand and needs 100 000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this
6 Hedging with forward contracts. Explain how a UK company could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a UK company could hedge payables in euros with a
5 Hedging with futures. Explain how a UK company could hedge net receivables in US dollars with futures contracts. Explain how a UK company could hedge net payables in Japanese yen with futures
4 Invoicing strategy. Assume that Citadel plc purchases some goods in Chile that are denominated in Chilean pesos. It also sells goods denominated in British pounds to some firms in Chile. At the end
3 Money market hedge on payables. Assume that Belmont plc has net payables of 200 000 Mexican pesos in 180 days. The Mexican interest rate is 7%over 180 days, and the spot rate of the Mexican peso is
2 Money market hedge on receivables. Assume that Hartland Point Ltd (UK) has net receivables of 100 000 Singapore dollars in 90 days. The spot rate of the S$ is £0.32, and the Singapore interest
1 Consolidated exposure. Quincy Corp. estimates the following cash flows in 90 days at its subsidiaries as follows:Determine the consolidated net exposure of the MNC to each currency. Net position in
6 Hopkins Ltd transported goods to Switzerland and will receive 2 000 000 Swiss francs in three months.It believes the three-month forward rate will be an accurate forecast of the future spot rate.
5 Using the information from question 4, suggest how Sanibel Ltd could more effectively insulate itself from the possible long-term appreciation of the US dollar.
4 Sanibel Ltd purchases US goods (and pays in dollars)every month. It negotiates a one-month forward contract at the beginning of every month to hedge its payables. Assume the US dollar appreciates
3 Using the information about Montclair from the first question, explain the possible advantage of a currency option hedge over a money market hedge for Montclair. What is a possible disadvantage of
2 Using the information in the previous question, would Montclair be better off hedging the payables with a money market hedge or with a forward hedge?
1 Montclair plc, a UK firm, plans to use a money market hedge to hedge its payment of 3 000 000 Australian dollars for Australian goods in one year.The UK interest rate is 7%, while the Australian
28 Daily exchange rates and annual reports. The following website provides daily exchange rate data for several currencies over the last few months:http://www.oanda.com.a Use this website to assess
27 Exposure of an MNC’s subsidiary. Le Rozier SA is a French firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan.This subsidiary pays its wages and its rent in
26 Invoicing policy to reduce exposure. Blackstone is a UK firm that exports its products to Canada. It faces competition from many firms in Canada. Its price to customers in Canada has generally
25 Potential effects if the United Kingdom adopted the euro. The British pound’s interest rate has historically been higher than the euro’s interest rate. The United Kingdom has considered
24 Lagged effects of exchange rate movements.Uton plc is an exporter of products to Singapore. It wants to know how its share price is affected by changes in the Singapore dollar’s exchange rate.
23 Changes in economic exposure. Walt Disney World built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate
22 Measuring economic exposure. Using the following cost and revenue information shown for DeKalb plc (UK) determine how the costs, revenue, and earnings items would be affected by three possible
21 Transaction exposure. Crediton plc is a UK firm that exports most of its products to Europe. It historically invoiced its products in euros to accommodate the importers. However, it was adversely
20 Using regression analysis to measure exposure.a How can a UK company use regression analysis to assess its economic exposure to fluctuations in the euro?b In using regression analysis to assess
19 Dual currency. In the early 1990s the UK government suggested that what is now called the euro could be used alongside local currencies. How would such a currency arrangement affect MNCs?
18 Speculating based on exposure. During the Asian crisis in 1998, there were rumours that China would weaken its currency (the yuan) against the US dollar and many European currencies. This caused
17 Impact of exchange rates on earnings. Cieplak NV is a Dutch-based MNC that has expanded into Asia. Its Dutch parent exports to some Asian countries, with its exports denominated in the Asian
16 Measuring changes in economic exposure.Renault SA measures the sensitivity of its profits to the pound and dollar exchange rate (relative to the euro). Explain how regression analysis could be
15 PPP and economic exposure. Boulder plc exports chairs to the US (invoiced in euros) and competes against local US companies. If purchasing power parity exists, why would Boulder not benefit from a
14 Economic exposure. Laurette SA is a French wholesale company that imports expensive highquality luggage and sells it to retail stores around Europe. Its main competitors also import high-quality
13 Economic exposure. Enid Ltd (UK) produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the
12 Economic exposure. Holbein BV (Netherlands) produces hospital equipment. Most of its revenues are in the United States. About half of its expenses are in Philippine pesos (to pay for Philippine
11 Transaction exposure. Aggie plc (UK) produces chemicals. It is a major exporter to the United States, where its main competition is from other European exporters. All of these companies invoice
10 Translation exposure. Consider a period in which the US dollar weakens against the euro. How will this affect the reported earnings of a European-based MNC with US subsidiaries? Consider a period
9 Factors that affect a firm’s translation exposure.What factors affect a firm’s degree of translation exposure? Explain how each factor influences translation exposure.
8 Measuring economic exposure. Boston Ltd (UK)hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.
7 Exposure of domestic firms. Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?
6 Transaction exposure. Fischer Ltd exports products from Europe to the US. It obtains supplies and borrows funds locally. How would the appreciation of the dollar be likely to affect its net cash
5 Currency effects on cash flows. How should appreciation of a firm’s home currency generally affect its cash inflows? How should depreciation of a firm’s home currency generally affect its cash
4 Currency correlations. Kopetsky SA (Poland) has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm’s overall degree of
3 Factors that affect a firm’s transaction exposure.What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics
2 Assessing transaction exposure. Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year:Provide your assessment as to
1 Transaction versus economic exposure. Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its ‘net’ cash flows in each currency when
5 Assume that the euro is expected to strengthen against the dollar over the next several years. Explain how this will affect the consolidated earnings of Europe-based MNCs with subsidiaries in the
4 Using the information in the previous question, consider a proposal to price the exports to the US in euros and to use the French source for material.Would this proposal eliminate the exchange rate
3 Assume your firm Paris SA (France) currently exports to the US on a monthly basis. The goods are priced in dollars. Once material is received from a source, it is quickly used to produce the
2 Brume SA (France) considers importing its supplies from either Switzerland (denominated in Swiss francs) or South Africa (denominated in rand) on a monthly basis. The quality is the same for both
1 Given that shareholders can diversify away an individual firm’s exchange rate risk by investing in a variety of firms, why are firms concerned about exchange rate risk?
4 Does it appear that all of the forecasting techniques will lead to the same forecast of the euro’s future value? Which technique would you prefer to use in this situation?
3 Explain how Jim can use a market-based forecast to forecast the future value of the euro. Do you think the market-based forecast will predict appreciation, depreciation, or no change in the value
2 Explain how Jim can use fundamental forecasting to forecast the future value of the euro. Based on the information provided, do you think that a fundamental forecast will predict appreciation or
1 Explain how Jim can use technical forecasting to forecast the future value of the euro. Based on the information provided, do you think that a technical forecast will predict future appreciation or
7 Do you think the technique you have identified in question 6 will always be the most accurate?Why or why not?
6 What is the expected percentage change in the value of the baht during the next quarter based on the fundamental forecast? What is the forecasted value of the baht using this forecast? If the value
5 Assume that the technical forecast has been more accurate than the market-based forecast in recent weeks. What does this indicate about market efficiency for the baht–pound exchange rate? Do you
4 The current 90-day forward rate for the baht is£0.014. By what percentage is the baht expected to change over the next quarter according to a market-based forecast using the forward rate? What
3 Blades is considering using either current spot rates or available forward rates to forecast the future value of the baht. Available forward rates currently exhibit a large discount. Do you think
2 Which forecasting technique (i.e., technical, fundamental, or market-based) would be easiest to use in forecasting the future value of the baht? Why?
27 Select an exchange rate and a forward rate for a given period.a Calculate:St ¼ a0 þ a1 Ft–1 þ mt where:St ¼ the spot rate at time t, Ft–1 ¼ the forward rate prediction for time t made at
26 CME exchange rates. The website of the Chicago Mercantile Exchange (CME) provides information about the exchange and the futures contracts offered on the exchange. Its address is

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