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1. Your firm is a U.S.-based exporter. You have sold 1,000,000 worth of toys to an Italian firm. Payment from the Italian firm (in )
1. Your firm is a U.S.-based exporter. You have sold 1,000,000 worth of toys to an Italian firm. Payment from the Italian firm (in ) is due in 1 year. Your firm wants to hedge the receivable. The one-year interest is 5% in the U.S. and 2% in the euro zone. The spot exchange rate is $1.40/ . a) Consider the money market hedge. i) Figure out the present value of the receivable in euros. (20points) ii) Figure out your action. In other words, do you need to borrow or invest the present value of the receivable in the Eurozone now? (20points) iii) Figure out the future value of the receivable in dollars. (30points) iv) Figure out the artificial exchange rate for the receivable created by the money market hedging. (30points) b) Consider the forward market hedge. Do you take a long or short portion for the receivable? (20points) 4) The delivery of the underlying asset is seldom made in forward contracts while the delivery is usually made in futures contracts. (10points) a. True b. False 5) The quote for a swap is 4.504.60% for underlying dollar LIBOR. This means the swap bank pays fixed-rate of 4.50% against receiving dollar LIBOR while the swap bank receives fixed-rate of 4.60% against paying dollar LIBOR. (10points) a. True b. False 6) A clearinghouse serve as a third party to all transactions in swaps. (10points) a. True b. False 1. Your firm is a U.S.-based exporter. You have sold 1,000,000 worth of toys to an Italian firm. Payment from the Italian firm (in ) is due in 1 year. Your firm wants to hedge the receivable. The one-year interest is 5% in the U.S. and 2% in the euro zone. The spot exchange rate is $1.40/ . a) Consider the money market hedge. i) Figure out the present value of the receivable in euros. (20points) ii) Figure out your action. In other words, do you need to borrow or invest the present value of the receivable in the Eurozone now? (20points) iii) Figure out the future value of the receivable in dollars. (30points) iv) Figure out the artificial exchange rate for the receivable created by the money market hedging. (30points) b) Consider the forward market hedge. Do you take a long or short portion for the receivable? (20points) 4) The delivery of the underlying asset is seldom made in forward contracts while the delivery is usually made in futures contracts. (10points) a. True b. False 5) The quote for a swap is 4.504.60% for underlying dollar LIBOR. This means the swap bank pays fixed-rate of 4.50% against receiving dollar LIBOR while the swap bank receives fixed-rate of 4.60% against paying dollar LIBOR. (10points) a. True b. False 6) A clearinghouse serve as a third party to all transactions in swaps. (10points) a. True b. False
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