Discussion Problem Set 5_sols (1).docx - F494 Discussion...

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F494 Discussion Questions-- #5 Managing Exchange Risk Spring 2018 -- Brief Solutions Exchange Rate Exposure: 1) Madura Problems in Chapter 10, pp. 322-331 # 6, 15, 18, 21 #6) Fisher, Inc. exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Discussed in class --Should help its net cash flows….be sure you can explain why #15) Boulder, Inc. exports chairs to Europe (invoiced in $) and competes against local European companies. If PPP exists, why would Boulder not benefit from a stronger euro? Discussed in class ---either the US price will rise or the European price (in Euros) will have to fall if PPP holds, so the firm would not benefit from a $ depreciation. #18) During the Asian Crisis there were rumors that China would depreciate their currency against the $ and European currencies. This caused investors to sell stocks in countries like Japan, Taiwan and Singapore. Offer an intuitive explanation for this result. What types of Asian firms would be most affected? If China weakened its currency, importers of Asian products may purchase more Chinese products, which could have enhanced the performance of the Chinese exporters, but could have adversely affected the performance of the exporters in other Asian countries. Thus, there was concern that depreciation of the yuan would adversely affect the economies of the other countries. #21) Vegas Corp is a US firm that exports most of its products to Canada. It invoiced its products in CA dollars, but has since requested that its customers pay in US$ instead of CA $. Has the company’s transaction exposure changed? Has economic exposure changed? Transaction exposure is reduced since Vegas will have less receivables in Canadian dollars. However, the economic exposure will not necessarily be reduced because a weak Canadian dollar could cause a lower demand for its exports and will still affect cash flows. 1
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2) Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk? Discussed in class-- Diz has greater exposure---make sure you understand why 3) Jacko Co. is a U.S.-based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
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