Visor pharmaceutical, a U.S based multinational pharmaceutical company, is evaluating an export sale of itd cholestrol-reduction drug with a prospective indonesia distributor. The purchase would be fir 1650 million indonesian rupiah, which at the current spot exchange rate of rp9450/$ translates into nearly $175000. Although not a big sales

FOREIGN EXCHANGE MARKET AND TRADE - SMF 4053 Tutorial 5 1. In December 2005, two parties A & B, agreed on a five-year currency swap whereby A received payments in AUD and B received payments in Canadian Dollar (CAD) at a contracted exchange rate of 0.9181 (AUD/CAD). The notional principal of the swap is CAD500,000. The exchange rate assumed the following values on the payment dates: Payment Date Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Exchange Rate 1.0751 1.0672 1.0555 1.1942 1.2890 Calculate the payments (in AUD terms) received by A and B on each payment date. Calculate also net payments. 2. In December 2005, two parties A & B, agreed on a five-year fixed-for-floating Australian dollar swap, whereby A received payments based on floating interest rate and B received payments in fixed interest rate. The notional principal of the swap is AUD 500,000 and fixed rate is 4.95%. The floating interest rate assumed the following values on the payment dates: Payment Date Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Exchange Rate 4.62% 5.08% 6.03% 5.95% 5.70% Calculate the payments (in AUD terms) received by A and B on each payment date. Calculate also the net payments. 3 Trident Corporation entered into a three-year cross currency interest rate swap to receive U.S. dollars and pay Swiss francs. Trident, however, decided to unwind the swap after one year - thereby having two years left on the settlement costs of unwinding the swap after one year. Repeat the calculations for unwinding, but assume that the following rates now apply: Assumptions Notional principal Original spot exchange rate, SFr./$ New (1-year later) spot exchange rate, SFr./$ New fixed US dollar interest New fixed Swiss franc interest Values $10,000,000 1.5000 1.5560 5.20% 2.20% Swap Rates 3- year bid 3-year ask Original: US dollar Original: Swiss franc 5.56% 1.93% 5.59% 2.01% 4 Siam Cement, the Bangkok-based cement manufacturer, suffered enormous losses with the coming of the Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the mid-1990s, taking on massive quantities of foreign currency denominated debt (primarily U.S. dollars). When the Thai baht (B)was devalued from its pegged rate of B25.0/$ in July 1997, Siam's interest payments alone were over $900 million on its outstanding dollar debt (with an average interest rate of 8.40% on its U.S. dollar debt at that time). Assuming Siam Cement took out $50 million in debt in June 1997 at 8.40% interest, and had to repay it in one year when the spot exchange rate had stabilized at B42.0/$, what was the foreign exchange loss incurred on the transaction? 5 6 Vizor Pharmaceuticals, a U.S.-based multinational pharmaceutical company, is evaluating an export sale of its cholesterol-reduction drug with a prospective Indonesian distributor. The purchase would be for 1,650 million Indonesian rupiah (Rp), which at the current spot exchange rate of Rp9,450/$, translates into nearly $175,000. Although not a big sale by company standards, company policy dictates that sales must be settled for at least a minimum gross margin, in this case, a cash settlement of $168,000. The current 90-day forward rate is Rp9,950/$. Although this rate appeared unattractive, Vizor had to contact several major banks before even finding a forward quote on the rupiah. The consensus of currency forecasters at the moment, however, is that the rupiah will hold relatively steady, possibly falling to Rp9,400/$ over the coming 90 to 120 days. Analyze the prospective sale and make a hedging recommendation. Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and onethird in euros (Europe). In September Mattel delivers a large shipment of toys (primarily Barbies and Hot Wheels) to a major distributor in Antwerp. The receivable, 30 million, is due in 90 days, standard terms for the toy industry in Europe. Mattel's treasury team has collected the following currency and market quotes. The company's foreign exchange advisors believe the euro will be at about $1.4200/ in 90 days. Mattel's management does not use currency options in currency risk management activities. Advise Mattel on which hedging alternative is probably preferable. Current spot rate ($/) Credit Suisse 90-day forward rate ($/) Barclays 90-day forward rate ($/) Mattel Toys WACC ($) 90-day eurodollar interest rate 90-day euro interest rate 90-day eurodollar borrowing rate 90-day euro borrowing rate $1.4158 $1.4172 $1.4195 9.600% 4.000% 3.885% 5.000% 5.000% 7 Pupule Travel, a Honolulu, Hawaii - based 100% privately owned travel company has signed an agreement to acquire a 50% ownership share of Taichung Travel, a Taiwan - based privately owned travel agency specializing in servicing inbound customers from the United States and Canada. The acquisition price is 7 million Taiwan dollars (T$ 7,000,000) payable in cash in 3 months. Thomas Carson, Pupule Travel's owner, believes the Taiwan dollar will either remain stable or decline a little over the next 3 months. At the present spot rate of T$35/$, the amount of cash required is only $200,000 but even this relatively modest amount will need to be borrowed personally by Thomas Carson. Taiwanese interestbearing deposits by non-residents are regulated by the government, and are currently set at 1.5% per year. He has a credit line with Bank of Hawaii for $200,000 with a current borrowing interest rate of 8% per year. He does not believe that he can calculate a credible weighted average cost of capital since he has no stock outstanding and his competitors are all also privately-owned without disclosure of their financial results. Since the acquisition would use up all his available credit, he wonders if he should hedge this transaction exposure. He has quotes from Bank of Hawaii shown in the table below. Spot rate (T$/$) 33.40 3-month forward rate (T$/$) 3-month Taiwan dollar deposit rate 3-month dollar borrowing rate 3-month call option on T$ 32.40 1.500% 6.500% not available Analyze the costs and risks of each alternative, and then make a recommendation as to which alternative Thomas Carson should choose. 8 Lucky 13 Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q8,400,000 is due in six months. (\"Q\" is the symbol for Guatemalan quetzals.) Lucky 13 uses 20% per annum as its weighted average cost of capital. Today's foreign exchange and interest rate quotations are: Construction payment due in six-months (A/P, quetzals) Present spot rate (quetzals/$) Six-month forward rate (quetzals/$) Guatemalan six-month interest rate (per annum) U.S. dollar six-month interest rate (per annum) Lucky 13's weighted average cost of capital (WACC) 8,400,000 7.0000 7.1000 14.000% 6.000% 20.000% Lucky 13's treasury manager, concerned about the Guatemalan economy, wonders if Lucky 13 should be hedging its foreign exchange risk. The manager's own forecast is as follows: Expected spot rate in six-months (quetzals/$): Highest expected rate (reflecting a significant devaluation) Expected rate Lowest expected rate (reflecting a strengthening of the quetzal) 8.0000 7.3000 6.4000 What realistic alternatives are available to Lucky 13 for making payments? Which method would you select and why? 9 Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment applications in many other industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for 6,000,000, dirhams, payable in six months. Six-month call options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available from Bank Al-Maghrub at a premium of 2%. Six-month put options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available at a premium of 3%. Compare and contrast alternative ways that Micca might hedge its foreign exchange transaction exposure. What is your recommendation? Assumptions Shipment of phosphates from Morocco, Moroccan dirhams Micca's cost of capital (WACC) Spot exchange rate, dirhams/$ Six-month forward rate, dirhams/$ 10 Values 6,000,000 14.000% 10.00 10.40 Trident the same U.S.-based company as discussed in this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U.K.). Total payment of 3,000,000 is due in 90 days. Maria Gonzalez has also learned that Trident will only be able to borrow in the United Kingdom at 14% per annum (due to credit concerns of the British banks). Given the following exchange rates and interest rates, what transaction exposure hedge is now in Trident's best interest? Assumptions 90-day A/R in pounds Spot rate, US$ per pound ($/) 90-day forward rate, US$ per pound ($/) 3-month U.S. dollar investment rate 3-month U.S. dollar borrowing rate 3-month UK investment interest rate 3-month UK borrowing interest rate Put options on the British pound: Strike rates, US$/pound ($/) Strike rate ($/) Put option premium Strike rate ($/) Put option premium Trident's WACC Maria Gonzalez's expected spot rate in 90-days, US$ per pound ($/) Value 3,000,000.00 $1.7620 $1.7550 6.000% 8.000% 8.000% 14.000% $1.75 1.500% $1.71 1.000% 12.000% $1.7850