1.Intervention Effects on Corporate Performance. Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent US$200,000 in interest each month. Australia has just lowered its interest rate in order to boost domestic consumption, and the value of its currency falls (Australian dollar, A$). In each case below state whether these actions would increase, decrease, or have no effect on the following:

a.The volume of your subsidiarys sales in Australia (measured in A$) 4 Marks

b.The cost to your subsidiary of purchasing materials (measured in A$) 4 Marks

c.The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A$). 4 Marks

Also, briefly explain why in each answer.

12 Marks

2.Implications of a Fixed Currency for International Trade. Assume the Hong Kong dollar

(HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar.Last month, a HK$ = 0.16 Singapore dollars. Today, a HK$=0.18 Singapore dollars. Assume that there is much trade in the computer industry among Singapore, Hong Kong, and the U.S. and that all products are viewed as substitutes for each other and are of about the same quality. Assume that the firms invoice their products in their local currency and do not change their prices.

1. Will the computer exports from the U.S. to Hong Kong increase, decrease, or remain the same? Using steps, briefly explain why. 3 Marks

1. Will the computer exports from Singapore to the U.S. increase, decrease, or remain the same? Using steps, briefly explain why. 3 Marks

6 Marks

3.PPP and Cash Flows. Boston Co. will receive 1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It expects that inflation in countries using the euro will be 12% next year, while inflation in the U.S. will be 7% next year. Today the spot rate of the euro is $1.46, and the one-year forward rate is $1.50.

a.Estimate the amount of U.S. dollars that Boston will receive in one year when converting its euro receivables into U.S. dollars. 4 Marks

4.IFE and Forward Rate. The one-year Treasury (risk-free) interest rate in the U.S. is presently 6%, while the one-yearTreasury interest rate in Switzerland is 13%. The spot rate of the Swiss franc is $.80. Assume that you believe in the international Fisher effect. You will receive 1 million Swiss francs in one year.

a.What is the estimated amount of dollars you will receive when converting the francs to U.S. dollars in one year at the spot rate at that time?4 Marks

b.Assume that interest rate parity exists. If you hedged your future receivables with a one-year forward contract, how many dollars will you receive when converting the francs to U.S. dollars in one year?4 Marks

8 Marks

5.PPP: The inflation rate in the U.S. is 2%, while the inflation rate in Japan is 1.3%.

The current exchange rate for the Japanese yen () is $0.012. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity theory,

what will bethe new exchange rate for the yen? (Assume US is home). Use the formal

PPP formula. 4 Marks

6.Exposure of a Portfolio of Currencies. Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments from sales denominated in both euros and Canadian dollars in one month. Based on todays spot rates, the dollar value of the funds to be received is estimated at $400,000 U.S. for the euros and $600,000 U.S. for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 10 percent for the euro and 5 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.48. Assuming that on average, the currencies appreciate each month; 0.12 % percent per month for the euro and 0.15% per month for the Canadian dollar. This means average return due to currency fluctuations is 0.12% for euro, and 0.15% for Canadian dollar.

a)Describe why holding a portfolio of two foreign currencies with a correlation coefficient of 0.95 could be considered high risk.2 Marks

b)What is the expected % rate of return on the euro for the next month? How much is that in US dollars? 1 Mark

c)What is the expected % rate of return on the Canadian dollar for the next month? How much is that in US dollars. 1 Mark

d)What is the expected % rate of return on the portfolio in the next month? 2 Marks

e)What is the portfolios standard deviation?6 Marks

f)What is the maximum one-month loss of the currency portfolio? State % and US dollars?4 Marks

g)What is the new maximum one-month loss of the currency portfolio? State % and US dollars.2 Marks

Hint: Use a Z factor based on 95 percent confidence level and assume the probability of the monthly percentage changes for each currency are normally distributed.

Total 18 Marks

7.Vogl Company is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table:

Currency

Total Inflow

Total Outflow

Canadian dollars (C$)

C$35,000,000

C$4,000,000

New Zealand dollars (NZ$)

NZ$5,000,000

NZ $1,000,000

Mexican pesos (MXP)

MX.P. 11,000,000

MX.P. 10,000,000

Singapore dollars (S$)

S$4,000,000

S$10,000,000

The spot rates and one-year forward rates as of today are:

Currency

Spot Rate

One-Year Forward Rate

C$

$ 0.70

$ 0.75

NZ$

0.60

0.58

MXP

0.18

0.15

S$

0.65

0.60

a.Based on the information provided, determine the net exposure of each foreign currency in US dollars. 8 Marks

b.Given the forecast of the Canadian dollar along with the forward rate of the Canadian dollar, what is the expected increase or decrease in US dollar cash flows that would result from hedging the net cash flows in Canadian dollars one year forward? Would you hedge the Canadian dollar position? Why?

5 Marks

c.Given the forecast of the Singapore dollar along with the forward rate of the Singapore dollar, what is the expected increase or decrease in US dollar cash flows that would result from hedging the net cash flows in Singapore dollars one year forward? Would you hedge the Singapore dollar position? Why?

5 Marks

Total 18 Marks

8.Measuring Economic Exposure. Assume you live in the U.S. Using the following cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and net cash flow would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$):

1) NZ$ = $.50,

2) NZ$ = $.55, and

3) NZ$ = $.60.

It expected that all of DeKalb U.S. revenues, costs and expenses will grow by 1.5 %

per year

After the three scenarios have been completed try to provide a model equation in the

form of

PCF_t = a₀ + a₁e_t + m_t ,to predict percentage changes in the companys cash flow

based on

percentage change in the New Zealand dollar.15 Marks

Note: PCF_tis the percentage change in inflation-adjusted cash flows measured in the firm's home currency (U.S. dollars) over period t, and e_t is the percentage change in the exchange rate of the foreign currency over period t.

Forecasted Net Cash Flows:DeKalb Inc.

(in millions of U.S. dollars and New Zealand dollars)

New Zealand

U.S. BusinessBusiness

Sales$800NZ$800

Cost of Materials500100

Operating Expenses3000

Interest Expense1000

Cash Flow ($100)NZ$700

Total 85 Marks

Plus 5 marks for: i) cover page, ii) neatness, iii) organization, iv) quality work, v) Using MS Word: TOTAL 90 Marks