(a) Explain four reasons why multinational corporations (MNCs) forecast exchange rates. (b) (4 marks) SPL Limited,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
(a) Explain four reasons why multinational corporations (MNCs) forecast exchange rates. (b) (4 marks) SPL Limited, a company based in Kenya expects to receive 2 million Euros in one year's time. The existing spot rate of the Euro is KES 120/EUR. The 1-year forward rate of the Euro is KES 121/EUR. The company expects the spot rate of the Euro to be KES 122/EUR in one year. There are 1-year put options on Euros available in the market with an exercise price of KES 123 and a premium of KES 4 per unit. The following money market rates are available: Deposit rate Borrowing rate Kenya Eurozone 8% 5% 9% 6% Required: (i) The cash flow to be received in Kenya Shillings (KES) assuming SPL Limited uses money market hedge. (3 marks) (ii) The cash flow to be received in KES assuming SPL Limited decides to use a put option hedge. (2 marks) (iii) Advise the management on the best strategy to adopt. (1 mark) (c) Douglas Kombo specialises in cross-rate arbitrage. He notices the following quotes: SFr 1.5971/$ Swiss Franc/United States dollar Australian Dollar/United States Dollar = A $ 1.8215/$ Australian Dollar/Swiss Franc Required: A $ 1.440/SFr Arbitrage profit, if any, assuming Douglas has $1,000,000 to invest. (5 marks) (d) The following interaffiliate cash flows are uncorrelated with one another: Affiliate Expected Standard transaction deviation (S) ($) United States 100,000 40,000 Canada 150,000 60,000 Zambia 175,000 30,000 Egypt 200,000 70,000 Required: (i) The standard deviation of the portfolio of cash held in the central depository. (2 marks) (ii) Outline three advantages of centralised cash management system to the multinational corporations (MNCs) (a) Explain four reasons why multinational corporations (MNCs) forecast exchange rates. (b) (4 marks) SPL Limited, a company based in Kenya expects to receive 2 million Euros in one year's time. The existing spot rate of the Euro is KES 120/EUR. The 1-year forward rate of the Euro is KES 121/EUR. The company expects the spot rate of the Euro to be KES 122/EUR in one year. There are 1-year put options on Euros available in the market with an exercise price of KES 123 and a premium of KES 4 per unit. The following money market rates are available: Deposit rate Borrowing rate Kenya Eurozone 8% 5% 9% 6% Required: (i) The cash flow to be received in Kenya Shillings (KES) assuming SPL Limited uses money market hedge. (3 marks) (ii) The cash flow to be received in KES assuming SPL Limited decides to use a put option hedge. (2 marks) (iii) Advise the management on the best strategy to adopt. (1 mark) (c) Douglas Kombo specialises in cross-rate arbitrage. He notices the following quotes: SFr 1.5971/$ Swiss Franc/United States dollar Australian Dollar/United States Dollar = A $ 1.8215/$ Australian Dollar/Swiss Franc Required: A $ 1.440/SFr Arbitrage profit, if any, assuming Douglas has $1,000,000 to invest. (5 marks) (d) The following interaffiliate cash flows are uncorrelated with one another: Affiliate Expected Standard transaction deviation (S) ($) United States 100,000 40,000 Canada 150,000 60,000 Zambia 175,000 30,000 Egypt 200,000 70,000 Required: (i) The standard deviation of the portfolio of cash held in the central depository. (2 marks) (ii) Outline three advantages of centralised cash management system to the multinational corporations (MNCs)
Expert Answer:
Answer rating: 100% (QA)
Answer a Four reasons why multinational corporations MNCs forecast exchange rates include managing c... View the full answer
Related Book For
International Financial Management
ISBN: 978-0078034657
6th Edition
Authors: Cheol S. Eun, Bruce G.Resnick
Posted Date:
Students also viewed these finance questions
-
Assume that Wolverine expects to receive NZ$500,000 at the end of Year 1. The existing spot rate of the New Zealand dollar is $0.60, while the one-year forward rate is $0.62. Wolverine has created a...
-
Consider an increasing marginal-cost depletable resource with no effective substitute. (a) Describe, in general terms, how the marginal user cost for this resource in the earlier time periods would...
-
Designate the (R) or (S) configuration at each chirality center in the following molecules. Cl SH Br Br
-
A cleated conveyor belt transports solid homogeneous cylinders up a 15 incline. The diameter of each cylinder is half its height. Determine the maximum acceleration which the belt may have without...
-
Recall that the randomization test for the data in Example 3.5 fails to find evidence of a significant increase in the amount of wear with material B. Does this mean that material B has equivalent...
-
The unadjusted trial balance of Avery Air Purification System at December 31, 2018, and the data needed for the adjustments follow. Adjustment data at December 31 follow: a. On December 15, Avery...
-
Image transcription text Requirements Statement for Meeting Scheduling Software: Many ventures both academic and business require constant collaboration to be successful. The most basic form of...
-
Consider the following differential equation dy = v(zy -). %3D dr 1. (5 points) Which of the following gives a right description of the differential equation? (A) Linear (B)Exact (C)Homogeneous (D)...
-
Define the term core competency and describe why its important for a firm to have one or more core competencies. How do a companys core competencies help shape its business model?
-
Describe the most common sources of equity funding.
-
What is meant by the term customer interface? Explain how Dell and Hewlett-Packard differ from each other on this core dimension.
-
Describe the impact of a firms pricing structure on its business model.
-
Write a mission statement for 99designs, the company highlighted in the Partnering for Success feature. How can this statement help clarify and direct the core strategy component of 99designs...
-
Thinking of the Middle East, identify where you encounter products, services, or food items that should be relatively uniform and are based on standard inputs or costs. Identify the items, their...
-
In Problem 8.43, determine the smallest value of for which the rod will not fall out of the pipe. IA -3 in.-
-
An open drainage canal with a rectangular cross section is $3 \mathrm{~m}$ wide and $1.5 \mathrm{~m}$ deep. If the canal slopes $950 \mathrm{~mm}$ in $1 \mathrm{~km}$ of length, what is the maximum...
-
You must design and specify equipment for transporting $100 %$ acetic acid (density $=1000 \mathrm{~kg} / \mathrm{m}^{3}$, $\mu=1 \mathrm{mPa}$ s), at a rate of $11.3 \mathrm{~m}^{3} / \mathrm{h}$,...
-
The Alaskan pipeline was designed to carry crude oil at a rate of 1.2 million $\mathrm{bbl} / \mathrm{day}(1 \mathrm{bbl}=$ $42 \mathrm{gal})$. If the oil is assumed to be Newtonian, with a viscosity...
Study smarter with the SolutionInn App