Exam 2

# Exam 2 - FINA 4810 International Finance Fall 2006 Midterm...

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Profit (loss) on option contract FINA 4810 – International Finance Name __________ KEY _____________ Fall 2006 – Midterm 2 – Poulsen Page 1 of 10 Instructions: There are 9 pages in this exam, including this cover page. Formulas that may be useful are provided on page 9. All calculations must be shown to receive full credit. Please write all answers neatly and clearly. If you are not sure what a question is asking, indicate any assumptions that you may have made. You are responsible for all material written on the board/screen during the exam. All interest rates are annual rates unless otherwise stated. You may use a calculator on this exam. Computers may not be used in this exam. Sign the Honor Code. "I will be academically honest in all of my academic work and will not tolerate academic dishonesty of others." — UGA Student Honor Code Signed _______________________________________________

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FINA 4810 – International Finance Name __________ KEY _____________ Fall 2006 – Midterm 2 – Poulsen Page 2 of 10 Part 1. Hedged cost of funds. Joe Inc. borrowed 1,000,000 Danish kroner when the spot rate was 4.00 Kr/\$. Joe borrowed for three years at 16%, agreeing to make equal annual payments of 445,258 Kr (i.e. the present value of three equal payments of 445,258 Kr at a 16% discount rate is one million kroner). At the time Joe borrowed the kroner, Joe entered into forward contracts to buy kroner at 4.20 Kr/\$, 4.25 Kr/\$, and 4.50 Kr/\$, in each of the next three years, respectively, in order to hedge his kroner payments. Calculate the hedged cost of funds for Joe Inc. Filling in the table is optional – it’s provided to help you organize your thoughts if you would like. - The Hedged Cost of Funds is:
FINA 4810 – International Finance Name __________ KEY _____________ Fall 2006 – Midterm 2 – Poulsen Page 3 of 10 Part 2. Forward and money market hedges: Masters Inc. of the U.S. just sold a large amount of golf equipment to Crystal Hills Company of Belgium. Payment, which is invoiced in euros, is due in 6 months. Since Masters is not accustomed to foreign exchange risks, the company wishes to hedge this

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Exam 2 - FINA 4810 International Finance Fall 2006 Midterm...

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