Ummar is speculating in the movement of USD and EUR. Ummar has USD10 million to begin with, and Ummar must state all profits at the end of any speculation in USD. The spot rate on the euro is USD0.885/EUR, while the 30-days forward rate is USD0.900/EUR. (Note: State all answer in USD) a. If Ummar believes the euro will continue to slide in value against the U.S. dollar, and he expects the spot rate to be USD0.800/EUR at the end of 30 days, what should he do? (5 marks) b. If Ummar believes the euro will appreciate in value against the U.S. dollar, and he expects the spot rate to be USD0.950/EUR at the end of 30 days, what should he do? (5 marks) QUESTION 2 (10 MARKS) Theodre Group is a conglomerate located in Europe. Theodre Group is concerned on the depreciation of Euro in the future. The company expected to pay its Bahraini supplier BHD 2,500,000 in nine months. At the same time, Theodre Group is expected to receive a payment of NZD 2,000,000 from its customer in New Zealand, six months from now. The cost of capital for Theodre Group is 8%. The current spot rate is at EUR2.0833/BHD and NZD1.6855/EUR. The following information was given by Theodre Groups bank. 9-month option: Exercise Price Premium Call option on BHD BHD 0.4778/EUR 1.00% Put Option on BHD BHD 0.4777/EUR 0.95% 6-month investment rate in Europe 3% per annum 6-month investment rate in New Zealand 5% per annum 6-month borrowing rate in Europe 5% per annum 6-month borrowing rate in New Zealand 7% per annum a. How much is the receipt Theodre Group is able to get if the company decides to perform money market hedge of its account receivable? State your answer in EUR. (5 marks) b. Calculate the maximum cost that Theodre Group has to bear if the company decides to hedge its account payable using option. State your answer in EUR. (5 marks) QUESTION 3 (10 marks) a) Mashimoto Electric is based in Osaka, Japan. Mashimoto Electric has a subsidiary in Singapore that generates SGD 50 million in annual sales. Any earnings generated by the subsidiary are reinvested to support its operations. Benzai Electric is the close competitor of Mashimoto Electric. Benzai Electric is a local Japanese company located in Japan with 2 annual export sale to Singapore of about SGD 50 million. Based on the information provided, which firm is subject to a higher degree of translation exposure? Justify your answer with thorough explanation on both companies. (3 marks) b) Diamond Limited, a New Zealand company has an Australian subsidiary that earned AUD40 million this year. Little Limited, which is also resided in New Zealand has an Australian subsidiary that earned AUD30 million this year. The subsidiary of Diamond Limited plans to reinvest its earnings in Australia while the subsidiary of Little Limited plans to remit its earnings to the New Zealand parent. Another New Zealand company, Malee Limited does not have an Australian subsidiary but it received revenue of AUD50 million this year from exporting to Australia. All three companies have the same total revenue and total earnings levels (when considering their New Zealand business as well), and are the same size, and do not have any other international business. Which company is subject to the highest degree of translation exposure? Justify your answer with thorough explanation on both companies. (3.5 marks) c) Medi Darussalam and Sihat Begawan are Brunei-based companies with subsidiaries located in Singapore. Both companies distribute medical supplies (produced in Brunei) to customers throughout South East Asia. Both subsidiaries purchase the products at cost and sell the products at 90 percent markup. The other operating costs of the subsidiaries are very low. Medi Darussalam has a research and development center in Brunei that focuses on improving its medical technology. Sihat Begawan has a similar center based in Singapore. The parent of each firm subsidizes its respective research and development center on an annual basis. Which company is subject to a higher degree of economic exposure? Justify your answer with thorough explanation on both companies. (3.5 marks)