Lecture notes 3 IFM VK - Last week Homework2 Managing...

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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As International Financial Management II - 2017/S Lecture notes 3 - Hedging Exposure to Exchange Rates Fluctuations Maria Chiara Iannino 23th May 2017 IFM VK
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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As Managing Rate Exposure IFM VK
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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As Today’s lecture I To identify the commonly used techniques for hedging transaction exposure. I To show how each technique can be used to hedge future payables and receivables. I To compare the pros and cons of the different hedging techniques. I To suggest other methods of reducing exchange rate risk. I To explain how an MNC’s economic exposure can be hedged. I To explain how an MNC’s translation exposure can be hedged. Today’s Reading list: Madura and Fox, Chap. 11-12; Sercu, chap. 13. IFM VK
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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As Outline Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded Assignment IFM VK
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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As HW2.1 Measuring Economic Exposure Suppose you are a monopolist who faces a domestic demand curve given by Q = 1,000 - 2P. Your domestic cost of production involves domestic costs per unit of 300 and a foreign cost per unit produced of 150. If the real exchange rate is 1.1, what would be the price you would charge and the quantity you would sell? How do these variables change when the real exchange rate increases by 10%? IFM VK
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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As HW2.1 Solution The monopolist will operate where marginal revenue equals marginal cost. I Price = (1,000 Q) / 2 I Total revenue = P * Q = (1,000 Q Q2) / 2 I Marginal revenue = (1,000 2Q) / 2 = 500 Q. I Marginal cost = 300 + 1.1 * 150 = 465. Optimal production: 500 Q = 465 Q = 35 P = (1,000 35) / 2 = 482.5. IFM VK
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Last week Homework2 Managing Transaction Exposure Managing Economic Exposure Managing Translation Exposure Graded As HW2.1 Solution (2) If there is a 10% real appreciation of the foreign currency, the new real exchange rate is 1.1 * (1 + 10%) = 1.21. Marginal cost increases to 300 + 1.21 150 = 481.5, and the optimal quantity falls to 500 Q = 481 . 5 Q = 18 . 5 The relative price in the domestic market increases to: P = (1 , 00018 . 5) / 2 = 490 . 75 The 10% increase in the real exchange rate causes marginal cost to increase by 3.55% from 465 to 481.5. The price of the product increases by a smaller percentage, 1.71%, from 482.5 to 490.75.
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