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Chapter 10 6. Cash Flow Variability. How does currency hedging theoretically change the expected cash flows of the firm? 11. Unperformed Contracts. Which contract is more likely not to be performed: a payment due from a customer in foreign currency (a currency exposure), or a forward contract with a bank to exchange the foreign currency for the firm's domestic currency at a contracted rate (the currency hedge)? 4. P&G India. Procter and Gamble's affiliate in India, P&G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge an 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like P&G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy. Spot rate: 120.60/$ 180-day forward rate 2.400/Rps Expected spot, 180 days 2.6000 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agent's exchange rate 4.850% P&G India's cost of capital 12.000% 7. Krystal. Krystal is a U.S.-based company that manufactures, sells, and installs water purification equipment. On April 11, the company sold a system to the City of Nagasaki, Japan, for installation in Nagasaki's famous Glover Gardens (where Puccini's Madame Butterfly waited for the return of Lt. Pinkerton). The sale was priced in yen at 20,000,000, with payment due in three months. Spot exchange rate: 118.255/$ (closing mid-rates) 1-month forward rate: 117.760/$, a 5.04% per annum premium 3-month forward: 116.830/$, a 4.88% per annum premium 1-year forward: 112.450/$ a 5.16% per annum premium Money Rates United States Japan Differential One month 4.8750% 0.09375% 4.78125% Three months 4.9375% 0.09375% 4.84375% Twelve months 5.1875% 0.31250% 4.87500% Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot 118.255/$, forn example, is a mid-point range. On April 11, the spot yen traded in London from 118.30/$ to 117.550/$. Aquatech's Japanese competitors are currently borrowing yen from Japanese banks at a spread of two percentage points above the Japanese money rate. Krystal's weighted average cost of capital is 16%, and the company wishes to protect the dollar value of this receivable. 3-month options are available from Kyushu Bank: call option on 20,000,000 at exercise price of 118.00/$: a 1% premium; or a put option on 20,000,000, at exercise price of 118.00/$: a 3% premium. a. What are the costs and benefits of alternative hedges? Which would you recommend, and why? b. What is the break-even reinvestment rate when comparing forward and money market alternatives? 15. Maria Gonzalez and Ganado. Ganadothe U. S.-based company discussed in this chapterhas concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of 3,000,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14% per annum (due to credit concerns of the British banks). Given the following exchange rates and interest rates, what transaction exposure hedge is now in Ganado's best interest? Chapter 11 6. Functional Currency Designation. Can or should a company change the functional currency designation of a foreign subsidiary from year to year? If so, when would it be justified? 9. Translating Assets. What are the major differences in translating assets between the current rate method and the temporal method? 1. Ganado Europe (A). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/ to $0.9000/ (rather than to $1.0000/). Recalculate Ganado Europe's translated balance sheet for January 2, 2006, with the new exchange rate using the current rate method. a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? 2. Ganado Europe (B). Using facts in the chapter for Ganado Europe, assume as in Problem 1 that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/ to $0.9000/ (rather than to $1.0000/). Recalculate Ganado Europe's translated balance sheet for January 2, 2006, with the new exchange rate using the temporal rate method. a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? c. Why does the translation loss or gain under the temporal method differ from the loss or gain under the current rate method? 3. Ganado Europe (C). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/ to $1.500/. Calculate Ganado Europe's translated balance sheet for January 2, 2006, with the new exchange rate using the current rate method. a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? 4. Ganado Europe (D). Using facts in the chapter for Ganado Europe, assume as in Problem 3 that the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/ to $1.5000/. Calculate Ganado Europe's translated balance sheet for January 2, 2006, with the new exchange rate using the temporal method. a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? Chapter 12 7. Macroeconomic Uncertainty. Explain how the concept of macroeconomic uncertainty expands the scope of analyzing operating exposure. 11. Proactive Management. Operating exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly employed proactive policies? 1. Mauna Loa Macadamia. Mauna Loa Macadamia, a macadamia nut subsidiary of Hershey's with plantations on the slopes of its namesake volcano in Hilo, Hawaii, exports macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to Japanese customers of 1,200,000,000. At the present exchange rate of 125/$, this is equivalent to $9,600,000. Sales are relatively equally distributed throughout the year. They show up as a 250,00,000 account receivable on Mauna Loa's balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically 100,000,000. Mauna Loa would like to hedge its yen receipts, but it has too many customers and transactions to make it practical to sell each receivable forward. It does not want to use options because they are considered to be too expensive for this particular purpose. Therefore, they have decided to use a \"matching\" hedge by borrowing yen. a. How much should Mauna Loa borrow in yen? b. What should be the terms of payment on the yen loan? 6. Ganado GermanyAll Domestic Competitors. Using the Ganado Germany analysis in Exhibits 12.5 and 12.6 where the euro depreciates, how would prices, costs, and volumes change if Ganado Germany was operating in a mature mostly-domestic market with major domestic competitors 7. Ganado GermanyAll Foreign Competitors. Ganado Germany is now competing in a number of international (export) markets, growth markets, in which most of its competitors are foreign. Now how would you expect Ganado Germany's operating exposure to respond to the depreciation of the euro