1. The Tim Galli Corporation expects to receive 1,000,000 Euros in one year (this is an account receivable.) Tim has the following information: (25 points)

• Spot rate on the Euro as of today is = $1.40
• One year forward rate of the Euro is = $1.50

• Spot rate on the Euro as of today is = $1.40
• One year forward rate of the Euro is = $1.50
• Interest rates are as follows:

Euro U.S.

One year deposit rate 4.5% 6.0%

One year borrowing rate 5.0% 5.5%

• A call option on Euro has an exercise price of $1.45 and a premium of $.03.
• A put option on Euro has an exercise price of $1.45 and a premium of $.02.
• Tim Galli Corporation forecasted the future spot rate as follows:

Possible outcome Probability

$1.10 25%

$1.45 50%

$1.70 25%

1. Evaluate a forward hedge. What is the advantage and disadvantage of this kind of contract for Tim Galli Corporation.?
2. Evaluate a money market hedge. What is the advantage and disadvantage of this kind of contract for Tim Galli Corporation.?
3. Evaluate and option hedge. What is the advantage and disadvantage of this kind of contract for Tim Galli Corporation.?
4. Evaluate remaining unhedged. What is the advantage and disadvantage of this remaining unhedged for Tim Galli Corporation.?
5. Which alternative would you recommend and why?

2. Angersbach and Olsen, corporations both seek funding at the lowest possible cost. They face the following rate structures: (15 points)

	Angersbach	Olsen
Cost of fixed-rate borrowing	9.00%	10.50%
Cost of floating-rate borrowing	LIBOR+0.50%	LIBOR+1.00%

1. In what type of borrowing does Angersbach have a comparative advantage? Why?
2. In what type of borrowing does Olsen have a comparative advantage? Why?
3. If an interest rate swap were arranged between the two firms, what would be the maximum savings?
4. Illustrate an interest rate swap that would generate savings divided equally between the two firms.

2. Carefully explain a Currency Swap. Draw a diagram to illustrate your answer.(10 points)

4. What is the transfer pricing problem? Explain how the presence of different tax rates faced by divisions in different countries may influence decisions about what transfer price to use. (10 points).

3. Carefully explain how a multinational company can hedge using Exposure Netting Include a graph in your explanation. (10 points).

6. Compare and contrast translation exposure, transaction exposure, and operating exposure. Give an example of each. Be sure to mention how a company can protect itself from each of these exposures. (20 points).

7. What is a reinvoicing center? Carefully explain a reinvoicing center using a diagram. (10 points).