QUESTION 53 For the next ten questions suppose the following data holds: Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,000,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. The spot exchange rate is $1.215/. The six month forward rate is $1.2/. Plains States' cost of capital is 12% per annum The Euro zone 6-month borrowing rate is 6.5% per annum (or 3.25% for 6 months) The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months) The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months) The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months) December put options for 625,000; strike price $1.23, premium price is 1.5% Plains States' forecast for 6-month spot rates is $1.24/ The budget rate, or the lowest acceptable sales price for this project, is $1,160,000 or $1.16/. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be $1,137,500 undeterminable today $1,115,500 O $1,125,000 QUESTION 54 Refer to the information above. If Plains States chooses to hedge its transaction exposure in the forward market, the company will rate of buy; $0.8/ buy; $1.2/ sell; $1.2/ sell; $0.82/ 1,000,000 forward at a QUESTION 55 Refer to the information above. Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be $1,125,000 $1,200,000 $1,230,000 $1,240,000 QUESTION 63 For the next 6questions suppose the following data holds: The Japanese subsidiary of a U.S. parent has the following balance sheet (in Japanese yen): Cash Receivables Inventory Net plant & equipment Total 200,000 400,000 Current liabilities Long-term debt 600,000 Owner's equity 800,000 2,000,000 Total 400,000 400,000 1,200,000 2,000,000 The Japanese yen drops in value from 100/$ to 125/$. The historical costs for different accounts are as follows: inventory Common stock 100/$ 80/$ fixed assets 80/$ When the balance sheet is translated by the current rate method, how much translation adjustment would the U.S. parent's balance sheet have before the exchange rate changes? -$4,000 -$3,000 -$2,000 -$1,000 -$500 QUESTION 64 Continuation of the previous problem: The Japanese subsidiary of a U.S. parent has the following balance sheet (in Japanese yen): Cash Receivables Inventory Net plant & equipment Total 200,000 400,000 Current liabilities Long-term debt 600,000 Owner's equity 800,000 2,000,000 Total 400,000 400,000 1,200,000 2,000,000 The Japanese yen drops in value from 100/$ to 125/$. The historical costs for different accounts are as follows: inventory Common stock 100/$ 80/$ fixed assets 80/$ When the balance sheet is translated by the current rate method, how much translation adjustment would the U.S. parent's balance sheet have after the exchange rate changes? -$5,400 -$4,500 -$3,600 -$2,400 -$1,200 QUESTION 65 Continuation of the previous problem: The Japanese subsidiary of a U.S. parent has the following balance sheet (in Japanese yen): Cash Receivables Inventory Net plant & equipment Total 200,000 Current liabilities 400,000 Long-term debt 600,000 Owner's equity 800,000 2,000,000 Total 400,000 400,000 1,200,000 2,000,000 The Japanese yen drops in value from 100/$ to 125/$. The historical costs for different accounts are as follows: inventory Common stock 100/$ 80/$ fixed assets How much is the net exposed assets in yen when the current rate method is used? 500,000 700,000 800,000 1,000,000 1,200,000 80/$ QUESTION 60 This question is a continuation of the above, and the following data holds for the next three more questions. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,000,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. The spot exchange rate is $1.215/. The six month forward rate is $1.2/. Plains States' cost of capital is 12% per annum The Euro zone 6-month borrowing rate is 6.5% per annum (or 3.25% for 6 months) The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months) The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months) The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months) December put options for 625,000; strike price $1.23, premium price is 1.5% Plains States' forecast for 6-month spot rates is $1.24/ The budget rate, or the lowest acceptable sales price for this project, is $1,160,000 or $1.16/. What is the cost of a put option hedge for Plains States' Euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.) $19,319 $20,013 $21,257 O 23,333 QUESTION 61 Refer to the information above. If the spot exchange rate 6 months later, ST turns out to be $1.25/, what is the payoff in 6 months of the accounts receivable hedged with the put option? $1,210,682 $1,230,682 $1,245,667 O $1,267,500 $1,278,133 QUESTION 62 Refer to the information above. If the spot exchange rate 6 months later, ST turns out to be $1.11/, what is the payoff in 6 months of the accounts receivable hedged with the put option? $1,210,682 $1,230,682 $1,245,667 $1,267,500 O $1,278,133 QUESTION 56 This question is a continuation of the above, and the following data holds for the next seven more questions. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,000,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. The spot exchange rate is $1.215/. The six month forward rate is $1.2/. Plains States' cost of capital is 12% per annum The Euro zone 6-month borrowing rate is 6.5% per annum (or 3.25% for 6 months) The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months) The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months) The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months) December put options for 625,000; strike price $1.23, premium price is 1.5% Plains States' forecast for 6-month spot rates is $1.24/ The budget rate, or the lowest acceptable sales price for this project, is $1,160,000 or $1.16/. If Plains States locks in the forward hedge at $1.2/, and the spot rate when the transaction was recorded on the books was $1.215/. this will result in a "foreign exchange loss" accounting transaction of $12,500 $15,000 $17,500 This was not a loss; it was a gain of $15,000. QUESTION 57 Refer to the information above. Plains States would be by an amount equal to with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct. worse off; $10,000 better off; $10,000 better off; $40,000 O worse off; $40,000 QUESTION 58 Refer to the information above. Plains States could hedge the Euro receivables in the money market. Using the information provided how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate? O $1,105,233 $1,158,000 $1,203,232 O $1,334,259 QUESTION 59 Refer to the information above. What is the euro borrowing interest rate that makes the money market hedge equivalent to the forward hedge? 7.06% 7.52% 7.85% 8.23%