1. Measuring Economic Exposure. Using the following cost and revenue information shown for DeKalb, Inc., determine how the total cash flow in USD would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZ$ = $.50, (2) NZ$ = $.55, and (3) NZ$ = $.60. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Please also calculate the economic exposure of the firm.

Forecasted Net Cash Flows: DeKalb Inc.

(in millions of U.S. dollars and New Zealand dollars)

New Zealand

U.S. Business Business

Sales $800 NZ$800

Cost of Materials 500 100

Operating Expenses 300 0

Interest Expense 100 0

Cash Flow $100 NZ$700

2. Assessing Exchange Rate Risk. Washington Co. and Vermont Co. have no domestic business.

They have a similar dollar equivalent amount of international exporting business. Washington Co. exports all of its products to Canada. Vermont Co. exports its products to Poland and Mexico, with about half of its business in each of these 2 countries. Each firm receives the currency of the country where it sends its exports. You obtain the end-of-month spot exchange rates of the currencies mentioned above during the end of each of the last 6 months.

End of Month	Canadian Dollar		Mexican Peso		Polish Zloty
1	$0.8142	$.09334		$.29914
2	0.8176	.09437		.29829
3	0.8395	.09241		.30187
4	0.8542	.09263		.3088
5	0.8501	.09251		.30274
6	0.8556	.09448		.30312

You want to assess the data in a logical manner to determine which firm has a higher degree of exchange rate risk. Show your work and write your conclusion. [HINT: The percentage change in the portfolio of currencies is a weighted average of the percentage change in each currency in the portfolio.]

3. A US MNC tries to sell off its assets in France and retain US dollars back. Now the company is facing three scenarios, and the euro value of its French assets and the exchange rate under each scenario is indicated in the table below.

1. Please answer the dollar value of the companys French assets under each case.

State	Probability	Euro Value	Exchange Rate 1	Dollar Value
Scenario 1	1/3	900	$1.35/
Scenario 2	1/3	1,000	$1.50/
Scenario 3	1/3	1,100	$1.65/

2. Please solve for the economic exposure of the companys French assets. In other words, how does the change of exchange rate affect the dollar value of the assets. To answer this question, you need to build a model

Dollar value of French Assets = alpha + beta* Exchange Rate

And then solve for beta.

Hint: use the statistics function of your calculator. Choose linear regression for calculation.

3. Implication

For hedging the risk, the company should sell _________ 1- year forward at $1.50/. Please calculate:

1. $ net cash flow when the French assets is worth 980, if the exchange rate is $1.35/ one year later

2. $ net cash flow when the French assets is worth 1,000, and the exchange rate is $1.50/

3. $ net cash flow when the French assets is worth 1,070, and the exchange rate is $1.65/