Question 1

A U.S. firm sells merchandise today to a Japanese company for 15,000,000. The current exchange rate is 100/$ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If in three months the exchange rate changes to 120/$ the U.S. firm will realize a ________ of ________.

Group of answer choices

loss; 125,000

gain; 125,000

loss; 25,000

loss; $25,000

gain; 25,000

gain; $25,000

Current FX rate is $1.25/. Joe, the currency speculator, expects the Euro to appreciate in three months. To generate speculative profit, Joe needs __________________.

Group of answer choices

to sell Euro forward

to sell a call option on Euro

to buy a put option on Euro

to buy a call option on Euro

Current spot rate is Ps19.7185/$. Find the expected spot rate of Ps/$, if Mexico expected inflation rate is 10.00% and US expected inflation rate is 6.00% and assuming the PPP holds. (Round your answer to 4 decimals)

Current spot rate is 109.54/$. Compute the 270-days forward rate rate of /$, if US interest rate is 6.50% and Japan interest rate is 2.00%, assuming the interest rate parity holds.

Lexus LC costs in Japan 9,500,000 and is currently sold in the USA for $96,820. The current FX rate is 98.1200/$. Compute the new price of Lexus LC in USD, if FX rate changed to 95.8200/$ and Lexus uses 90% pass-through policy. (Round your answer to the nearest dollar).

Table #1
Funds available for arbitrage	$4,000,000
US interest rate	6%
Mexico interest rate	4%
Spot rate	Ps19.7812/$
90-day Forward Rate	Ps19.2131/$
Investment for	90 days

By using data from Table #1 find the forward premium on Foreign Currency in % (Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 4 decimal places. For example, 0.1234567 or 12.34567% should be entered as 12.3457.)

By using data from Table #1 find the CIA profit potential in %. (Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 4 decimal places. For example, 0.1234567 or 12.34567% should be entered as 12.3457.)

By using data from Table #1, find the total proceeds (principal + interest income) of the investment for 90 days in Peso. (Round to the nearest Peso).

By using data from Table #1, find the total opportunity cost of capital (Hint: find proceeds of 90-day investment in USD: principal + interest income). (Round to the nearest Dollar).

By using data from Table #1, find the CIA profit (after accounting for the opportunity cost of capital; do not round intermediate calculations; Round your final answer to the nearest US dollar).

Bobcat Inc. a US-based manufacturer of heavy industrial equipment just purchased components for its manufacturing process for A$1,000,000 from a company in Australia. According to the terms of sale, Bobcat is allowed to make a payment in 180 days. You need to help Bobcat Inc. to explore different ways of hedging its accounts payable by using information below and make a decision.

Table #2

Current spot rate	A$1.2511/$
3-month forward rate	A$1.2564/$
6-month forward rate	A$1.2603/$
12-month forward rate	A$1.2782/$
180-day Investing rate in USA	3%
180-day borrowing rate in USA	4%
180-day investing rate in Australia	2%
180-day borrowing rate in Australia	3%
Bobcat's WACC	10%
Premium PUT option	3%
Premium CALL option	1%
CALL and PUT options strike price	A$1.3064/$

Use data from Table #2

Forward hedge (1)

Calculate the total payment in USD, if Bobcat hedges the contract using forward market hedge. Round your answer to the nearest dollar.

Use data from Table #2

Money market hedge (1)

Find the amount you need to borrow or invest today in Australian Dollars (A$). Round your answer to the nearest dollar.

Use data from Table #2

Money market hedge (2)

How much USD will the company need to pay today to obtain the needed amount of Australian Dollars. Round your answer to the nearest dollar.

Use data from Table #2

Money market hedge (3)

Carry the amount of USD from the previous question forward 180 days. Round your answer to the nearest dollar.

Use data from Table #2

Option hedge (1)

What option should you buy to hedge Bobcat's transaction exposure in the option market?

Group of answer choices

Put

Call

Use data from Table #2

Option hedge (2)

Calculate the options premium in USD today. Round your answer to the nearest dollar.

Use data from Table #2

Option hedge (3)

Carry the option's premium 180 days forward. Round your answer to the nearest dollar.

Use data from Table #2

Option hedge (4)

If Bobcat exercises the option at the strike price, how much will Bobcat pay in USD in 180 days? (Do not account for the option's premium). Round your answer to the nearest dollar.

Use data from Table #2

Option hedge (5)

Find the total cost of the option hedge to Bobcat in USD, if the management choose to hedge on the option market and the option is exercised? (Hint: include option premium). Round your answer to the nearest dollar.