Noir is a French-based company which exports equipment to USA. Sales are forecasted for 10 000 units at EUR 40 per unit. Unit variable costs are EUR 22. The USD trades at USD 1.15/EUR. Noir forecasts an exchange rate of USD 1.10/EUR.

Analyze the two following cases:
Case 1: maintain the same USD price and volume stays the same. Case 2: keep the same EUR price and volume decreases by 30%.

Which case is better for Noir?

2. White Company is a US-based company which exports equipment to Mexico. Sales are forecasted for 10 000 units at USD 60 per unit. Unit variable costs are USD 40. The Mexican Peso trades at MXP 21/USD. White forecasts an exchange rate of MXP25/USD.

Analyze the two following cases:
Case 1: maintain the same MXP price and volume stays the same. Case 2: keep the same USD price and volume decreases by 30%. Which case is better for White?

3. Green has just sold equipment to Brown. Green is a US company who has USD accounting. Sale date is June 2020 and payment date December 2020.

Deal amount €1 000 000
Spot June = $1.15/€
6-month forward contract = $1.14€
Spot December forecast = $1.16/€
Eurozone 6-month borrowing rate = 1.0%/year
Determine foreign exchange gains/(losses) if Green hedges with

1. 100% with forwards

2. 50% with forwards

3. does not hedge

4. money market hedge, how much should they borrow and in which currency?

e. money market hedge, how much are the USD proceeds?

4. Pink has just sold equipment to Black. Pink is a US company who has USD accounting. Sale date is March 2020 and payment date is September 2020.

Deal amount €2 000 000
Spot March = $1.20/€
6-month forward contract = $1.14€
Spot September forecast = $1.16/€
Eurozone 6-month borrowing rate = 2.0%/year

a. 100% with forwards

b. 50% with forwards

c. does not hedge

d. money market hedge, how much should they borrow and in which currency?

e. money market hedge, how much are the USD proceeds?

5. Determine the cost for a typical advanced payment guarantee:

Estimated amount of contract = $2 000 000 Advanced payment = 20%
Interest rate = 1.2%/year
Handling charge = one month of interest

Duration = 6 months

6. Determine the cost for a typical trade guarantee:

Amount of guarantee = $1 500 000 Interest rate = 1.2%/year
Handling charge = one month of interest Duration = 6 months

7. Determine the cost for a typical trade guarantee:

Amount of guarantee = $500 000 Interest rate = 1.2%/year
Handling charge = one month of interest Duration = 12 months

8. You are reading through the bid documents for a major tender you are leading for your company. The documents call for a Bid Guarantee of 5% of the contract amount.

If you intend to bid €20 million, estimate how much the guarantee will cost your company if the guarantee is for 6 months? (You will need to estimate interest rates and fees)

a. If you lose the bid, do you get the cost of the Bid Guarantee back?

b. If you win the bid and refuse to sign, what will the buyer do?

c. To whom do you pay the cost of the guarantee?