Q1. GP-Reyna Motors Inc. is a new energy vehicles manufacturer based in Detroit, United States. Recently, it exported 20 units of its newly launched special utility new energy vehicle (SUV) Gio-21 at a price of Ukrainian hryvnia (UAH) 487,500 per unit to its distributor based in Kyiv. Rebrov Ltd.. This accounts receivable amounted to UAH 9.750,000 will be due in three months from today. With good financial and working capital management, GP-Reyna Motors Inc. always has a cash surplus and always able to maintain its optimal capital structure. It has a 12% weighted average cost of capital (WACC). Current spot exchange rate of UAH/USD is 27.0000 - 27.4000, 90-day forward quotation is 60 - 180 basis points. 90-day U.S. dollar interest rate is 2.5% - 2.8%. while 90-day Ukrainian hryvnia interest rate is 3.2% -3.4%. 90-day call option on UAH with a strike price of UAH27.2500/USD is available at a premium of 2.4%. 90- day put option on UAH with a strike price of UAH27.3600/USD is available at a premium of 1.8%. Based on the forecasting service obtained by GP-Reyna Motors Inc.. 90-day future spot rates are forecasted to be UAH27.0800/USD. UAH27.2800/USD and UAH27.4800/USD with probabilities of 40%. 30% and 30% respectively. Besides, GP-Reyna Motors Inc. has reached a risk-sharing agreement with its German automotive parts supplier based in Frankfurt, Ballack AG. Current spot exchange rate of USD/EUR is 1.2600 - 1.2880. For its accounts payable of EUR 300,000 due in one month time, the risk-sharing agreement stated that if the future spot rate at the end of one month is within plus or minus 5% from the current spot mid-rate, then GP-Reyna Motors Inc. bears all the exchange rate risk. If the future spot rate at the end of one month is outside the range, then Ballack AG will share the risk with GP-Reyna Motors Inc. on a basis of 50:50. Required: (a) Calculate total receipt in USD if GP-Reyna Motors Inc, implements a forward market hedge strategy. (4 marks) (b) Develop a currency option hedge strategy for GP-Reyna Motors Inc. and calculate the possible outcomes of total receipt in USD. Compare with the outcome of forward market hedge strategy in part (a) above, decide on the most optimal contractual hedging strategy (21 marks) (c) Calculate total payment in USD for GP-Reyna Motors Inc. and total receipt in EUR for Ballack AG if the future spot rate at the end of one month turns out to be USD1.3877/EUR. (11 marks) (d) Explain how sometimes multilateral netting strategy will contradict with transfer pricing strategy in minimising total tax bills for a multinational corporation that has subsidiaries located in several host countries. (4 marks) [Total: 40 marks) Q1. GP-Reyna Motors Inc. is a new energy vehicles manufacturer based in Detroit, United States. Recently, it exported 20 units of its newly launched special utility new energy vehicle (SUV) Gio-21 at a price of Ukrainian hryvnia (UAH) 487,500 per unit to its distributor based in Kyiv. Rebrov Ltd.. This accounts receivable amounted to UAH 9.750,000 will be due in three months from today. With good financial and working capital management, GP-Reyna Motors Inc. always has a cash surplus and always able to maintain its optimal capital structure. It has a 12% weighted average cost of capital (WACC). Current spot exchange rate of UAH/USD is 27.0000 - 27.4000, 90-day forward quotation is 60 - 180 basis points. 90-day U.S. dollar interest rate is 2.5% - 2.8%. while 90-day Ukrainian hryvnia interest rate is 3.2% -3.4%. 90-day call option on UAH with a strike price of UAH27.2500/USD is available at a premium of 2.4%. 90- day put option on UAH with a strike price of UAH27.3600/USD is available at a premium of 1.8%. Based on the forecasting service obtained by GP-Reyna Motors Inc.. 90-day future spot rates are forecasted to be UAH27.0800/USD. UAH27.2800/USD and UAH27.4800/USD with probabilities of 40%. 30% and 30% respectively. Besides, GP-Reyna Motors Inc. has reached a risk-sharing agreement with its German automotive parts supplier based in Frankfurt, Ballack AG. Current spot exchange rate of USD/EUR is 1.2600 - 1.2880. For its accounts payable of EUR 300,000 due in one month time, the risk-sharing agreement stated that if the future spot rate at the end of one month is within plus or minus 5% from the current spot mid-rate, then GP-Reyna Motors Inc. bears all the exchange rate risk. If the future spot rate at the end of one month is outside the range, then Ballack AG will share the risk with GP-Reyna Motors Inc. on a basis of 50:50. Required: (a) Calculate total receipt in USD if GP-Reyna Motors Inc, implements a forward market hedge strategy. (4 marks) (b) Develop a currency option hedge strategy for GP-Reyna Motors Inc. and calculate the possible outcomes of total receipt in USD. Compare with the outcome of forward market hedge strategy in part (a) above, decide on the most optimal contractual hedging strategy (21 marks) (c) Calculate total payment in USD for GP-Reyna Motors Inc. and total receipt in EUR for Ballack AG if the future spot rate at the end of one month turns out to be USD1.3877/EUR. (11 marks) (d) Explain how sometimes multilateral netting strategy will contradict with transfer pricing strategy in minimising total tax bills for a multinational corporation that has subsidiaries located in several host countries. (4 marks) [Total: 40 marks)
