Here is the problem set, have a look if you can help please.

Problem Set 2 BUSFIN 4252 International Finance Problem Set 2 BUSFIN 4252 - International Finance Due on: February 24, 2016 (before class) Note: Please make sure that you always show your calculations - it is not enough to state the final result. Problem 1 Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed 30 million which is payable in one year. The current spot exchange rate is $1.05/ and the annual interbank interest rate is 6.0% in the U.S. and 5.0% in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and wants to hedge its exposure through a forward hedge. a) What kind of forward contract should they enter, and what is the fair price of that forward contract? b) Suppose the actual one-year forward rate is $1.06/. Describe the forward hedge including all related cash-flows. c) A month passes, the spot rate is now $1.08/. What is the value of the forward position Boeing entered in b)? One of Boeing's consultants suggests thinking about a money market hedge instead. Boeing can borrow at 50bps above the inter-bank interest rate in the U.S. and also in France, while the interest on deposits that they get is 50bps below the inter-bank rates. d) Describe the money market hedge including all related cash-flows. Should Boeing prefer the money market hedge to the forward hedge? e) Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods? Problem Set 2 BUSFIN 4252 International Finance Problem 2 Suppose you are the CEO of a Japanese company that produces computers and exports them to the US. The price for a computer is always $700, and the dollar-yen forward with maturity at the end of next year is traded at 108/$. An analysis of the current market situation yields the following possible scenarios for the next year: In the baseline scenario (Scenario 1), the dollar-yen spot exchange rate is 100/$, and you sell 55,000 computers. In Scenario 2, the exchange rate is 110/$ and you sell 50,000 computers, while in Scenario 3 the exchange rate goes to 85/$ and you sell 57,000 computers. You assume that Scenario 1 will occur with probability 1/3, Scenario 2 with probability 1/2, and Scenario 3 with 1/6. Assume for simplicity that all customers pay for their computers at the end of next year. a) Quantify the overall foreign exchange exposure of your company by calculating an appropriate measure. b) Is the value of your measure rather \"low\" or \"high\"? Relate the value of the measure to transaction exposure and other economic foreign exchange exposure of the company. c) What would you do to hedge the foreign exchange exposure? Describe the hedge including all related cash-flows. d) Does the hedge completely eliminate the foreign exchange exposure? If not, why not? Problem Set 2 BUSFIN 4252 International Finance Problem 3 As a manager of an Italian clothing manufacturer, you are interested in buying a new high-speed production machine. There are two different companies - both based in the US - that sell this (identical) machine. Company A sells it for $10,900, payable in three months. Company B leaves it up to you if you want to pay in $ or in . Their price is either $10,800 or 10,000, payable in three months. a) Suppose you buy the machine from Company B. Characterize the foreign exchange exposure that Company B has acquired through this deal. b) If you have decided to buy from Company B, and the spot exchange rate in three months turns out to be $1.1/, which currency would you choose for the payment? c) Suppose that the current rate of a three-month forward is $1.095/. Does this information help you to decide whether to buy from A or from B? If yes, what is your decision? If no, what type of (publicly available) information would help you to make a decision