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Chapter 11 Questions (33 pts) Answer the following questions related to the readings from Chapter 11. The questions are in BOLD so please make sure your answers are NOT in bold as it will make grading the assignment much easier for me. 1) (6 pts) Assume that Stevens Point Co. has net receivables of 200,000 Singapore dollars in 60 days. The spot rate of the S$ is $0.72, and the Singapore periodic interest rate is 1.5% over 60 days (annual rate is 9% per year, so periodic rate is 1.5% per 60 days). Assume US periodic interest rates of 0.5% over 60 days or (annual rate is 6%, so periodic rate is 0.5% per 60 days). If the U.S. firm could implement a money market hedge, what is the value of the receivables in US dollars in 60 days using a money market hedge? Assume borrowing and lending rates are the same for simplicity. Be precise. 2) (6 pts) Assume that Vermont Co. has net payables of 1,000,000 Mexican pesos in 180 days. The Mexican periodic interest rate is 6% over 180 days (12% per year compounded semiannually), and the spot rate of the Mexican peso is $0.065. Assume US periodic interest rates of 1% over 180 days or (annual rate is 2%, so periodic rate is 1% per 180 days). What is the US dollar cost of the payables in 180 days if the firm uses a money market hedge? Assume borrowing and lending rates are the same for simplicity. Be precise. 3) (6 pts) Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the following probability distribution for the New Zealand dollar: Possible Value of New Zealand Dollar in 180 Days $.65 .68 .70 .74 .75 .77 Probability 5% 10% 30% 30% 20% 5% The 180-day forward rate of the New Zealand dollar is $.73. The spot rate of the New Zealand dollar is $.725. Develop a table showing a feasibility analysis for hedging. That is, determine the possible differences between the costs of hedging versus no hedging. What is the probability that hedging will be more costly to the firm than not hedging? 4) (3 pts) If hedging is expected to be more costly than not hedging, why would a firm even consider hedging? 5) (6 pts) Forward versus Money Market Hedge on Payables. Assume the following information: 90-day U.S. interest rate = 2% per 90 days or 8% per year compounded quarterly 90-day Malaysian interest rate = 2.5% per 90 days or 10% per year compounded quarterly Assume borrowing and lending rates are the same for simplicity. 90-day forward rate of Malaysian ringgit = $0.31 Spot rate of Malaysian ringgit = $0.30 Assume that the Santa Barbara Co. in the United States will need 500,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. 6) (6 pts) Forward versus Money Market Hedge on Receivables. Assume the following information: 180-day U.S. interest rate = 1.5% per 180 days or 3% per year compounded semi-annually 180-day British interest rate = 1% per 180 days or 2% per year compounded semi-annually 180-day forward rate of British pound = $1.32 Spot rate of British pound = $1.33 Assume that Riverside Corp. from the United States will receive 200,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge