Question 1

FORWARD HEDGE Would Oregon Co.s real cost of hedging Australian dollar payables every days have been positive, negative, or about zero on average over a period in which the Australian dollar strengthened consistently? What does this imply about the forward rate as an unbiased predictor of the future spot rate? Explain.

Question 2

CONTINUOUS HEDGING Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three months before the next order will arrive. In other words, Cornell is always covered for the next three monthly shipments. Because Cornell consistently hedges in this manner, it is not concerned with exchange rate movements. Is Cornell insulated from exchange rate movements? Explain.

Question 3

THE LONG-TERM HEDGE DILEMMA St. Louis, Inc., which relies on exporting, denominates its exports in pesos and receives pesos every month. It expects the peso to weaken over time. St. Louis recognizes the limitations of monthly hedging. It also recognizes that it could eliminate its transaction exposure by denominating its exports in dollars, but it would still be subject to economic exposure. The long-term hedging techniques have limitations, as the firm does not know how many pesos it will receive in the future, so it would have difficulty even if a long-term hedging method were available. How can this business realistically reduce its exposure over the long term?

Question 4

OVERHEDGING Denver Co. is about to order supplies from Canada that are denominated in Canadian dollars (C$). It has no other transactions in Canada and will not have any other transactions in the future. The supplies will arrive in one year, at which time payment will be due. There is only one supplier in Canada. Denver submits an order for three loads of supplies, which will be priced at C$3 million. The firm purchases C$3 million one year forward, because it anticipates that the Canadian dollar will appreciate substantially over the year. The existing spot rate is$ .62 , and the one-year forward rate is $.64 . The supplier is not sure if it will be able to provide the full order, so it guarantees Denver Co. only that it will ship one load of supplies. In this case, the supplies will be priced at C$ 1 million. Denver Co. will not know whether it will receive one load or three loads until the end of the year. Determine Denvers total cash outflows in U.S. dollars under the scenario that the Canadian supplier provides only one load of supplies and that the spot rate of the Canadian dollar at the end of one year is $.59 . Show your work.