A ZUZT-22 >> FIN 330-1 (LEC) >> International Finance . 1 Qu Fi Answer all parts of the question Question 1 Vodafone LLC (US) and AT&T LLC (US) are two of the biggest telecommunication service providers in the US. On top of their exsting profitable positions, they have continually been hedging the foreign currency earnings. While they manufacture or provide services in Europe, significant sales are coming from non-euro currency markets. How they hedge differ, however, dramatically. Whie Vodafone hedged to protect earnings. AT&T LLC has sometimes generated a significant proportion their earnings from their hedges. As the recent graduate from CUD, the CFO of Vodafone LLC (US) assigns you the important task of analyzing the different types of risk faced by the multinational, particularly, for European deals. The following transactions are of particular interest to the finance director: The Vodafone LLC parent company in the u.&has sold inventory in Italy for 87,600,000 payable in 45 days Current spot rote $0.7025/ 45-day forward rate $0.75/ Vodafone LLC's parent cost of capital is 12.0% US 45-day borrowing rate is 70% pa US 45-day investing rate is 5.0% pa Italy 45-day borrowing rate is 18.0% p.a. Italy 45-day investing rate is 3.0%. As a junior analyst, you forecast the futuro spot rate in 45 days to be $0.76/6. The borrowing rate in Italy is extremely high due to banks not willing to lend to US based companies. (a) explain the concept of hedging as to how it relates to international risk management, (b) Analyse the different types of risk faced by Vodafone based on the transaction move. You can assume the could appreciate or depreciate by 10%, and that you believe the future spot rate to be $0.76/C in 45 days, (c) If you want to hedge the risk by using a forward hedge, how would you proceed? Show your workings A ZUZT-22 >> FIN 330-1 (LEC) >> International Finance . 1 Qu Fi Answer all parts of the question Question 1 Vodafone LLC (US) and AT&T LLC (US) are two of the biggest telecommunication service providers in the US. On top of their exsting profitable positions, they have continually been hedging the foreign currency earnings. While they manufacture or provide services in Europe, significant sales are coming from non-euro currency markets. How they hedge differ, however, dramatically. Whie Vodafone hedged to protect earnings. AT&T LLC has sometimes generated a significant proportion their earnings from their hedges. As the recent graduate from CUD, the CFO of Vodafone LLC (US) assigns you the important task of analyzing the different types of risk faced by the multinational, particularly, for European deals. The following transactions are of particular interest to the finance director: The Vodafone LLC parent company in the u.&has sold inventory in Italy for 87,600,000 payable in 45 days Current spot rote $0.7025/ 45-day forward rate $0.75/ Vodafone LLC's parent cost of capital is 12.0% US 45-day borrowing rate is 70% pa US 45-day investing rate is 5.0% pa Italy 45-day borrowing rate is 18.0% p.a. Italy 45-day investing rate is 3.0%. As a junior analyst, you forecast the futuro spot rate in 45 days to be $0.76/6. The borrowing rate in Italy is extremely high due to banks not willing to lend to US based companies. (a) explain the concept of hedging as to how it relates to international risk management, (b) Analyse the different types of risk faced by Vodafone based on the transaction move. You can assume the could appreciate or depreciate by 10%, and that you believe the future spot rate to be $0.76/C in 45 days, (c) If you want to hedge the risk by using a forward hedge, how would you proceed? Show your workings
