Question
A multinational corporation has an operating subsidiary in Brazil, which generates revenues of BRL 10,000,000 per year. The subsidiary incurs expenses of BRL 8,000,000 per
A multinational corporation has an operating subsidiary in Brazil, which generates revenues of BRL 10,000,000 per year. The subsidiary incurs expenses of BRL 8,000,000 per year, which are paid in local currency. The parent company's functional currency is the US dollar (USD). The current spot exchange rate is 5 BRL/USD. The parent company is considering implementing a net investment hedging strategy to mitigate the currency risk associated with the subsidiary's operations. The company's target hedging ratio is 50%, and the forward exchange rate for 12 months is 4.8 BRL/USD. The cost of funds for the company in USD is 3% per annum, while the cost of funds for the company in Brazil is 8% per annum. Calculate the hedge amount required in USD terms, the cost of the hedge, and the net cash flow for the parent company at the end of 12 months.
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The detailed answer for the above question is provided below Step 1 Calculate the subsidiarys net income in USD terms To calculate the subsidiarys net income in USD terms we can convert the revenues a...Get Instant Access to Expert-Tailored Solutions
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