For each of the following two foreign exchange scenarios, one an international purchase and the other an international sale a) show the value of the transaction today in US$ b) provide an example exchange rate for a potential depreciation of the US$ and show the effect of this depreciated US$ on the value of the transaction in US$ c) provide an example exchange rate for a potential appreciation of the US$ and show the effect of this appreciated US$ on the value of the transaction in US$ d) determine the effect of a forward contract on the value of the transaction in US$ e) determine the effect of asset-liability hedging on the value of the transaction in US$ f) make a recommendation of whether the company should use a forward contract or asset-liability hedging in order to protect itself from foreign exchange risk

SCENARIO 1 Tough Appliances in the United States has just made a major purchase of sheet steel from Good-Enough Steel of China. Tough Appliances will pay Good-Enough Steel 80,000,000 China Yuan (CY) in 6-months. Tough Appliances has experienced losses in the past on such purchases because of movements in the foreign exchange rate between the CY and the US$. The current exchange rate is US$0.1594/CY and a 6-month forward contract is US$0.1582/CY. The annual current deposit rate in China is 1.5% and the annual prime lending rate is 4.35%. Tough Appliance's cost of capital is 7.50% per annum.