Tutorial+20 - 1 BUS3026W Finance II 2009 - Tutorial 20 Due:...

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Unformatted text preview: 1 BUS3026W Finance II 2009 - Tutorial 20 Due: Monday 19 th October 09 QUESTION 1 Suppose that Baltimore Machinery (a U.S firm) sold a drilling machine to a Swiss firm and gave the Swiss client a choice of paying either $10,000 or SF 15,000 in three months. a. In the above example, Baltimore Machinery effectively gave the Swiss client a free option to buy up to $10,000 dollars using Swiss franc. What is the ‘implied’ exercise exchange rate? b. If the spot exchange rate turns out to be $0.62/SF, which currency do you think the Swiss client will choose to use for payment? What is the value of this free option for the Swiss client? c. What is the best way for Baltimore Machinery to deal with the exchange exposure? [2, 2, 2] QUESTION 2 Explain cross-hedging and discuss the factors determining its effectiveness. [3] QUESTION 3 a. How would you define economic exposure to exchange risk? b. Explain the competitive and conversion effects of exchange rate changes on the firm’s operating cash flow. Explain the competitive and conversion effects of exchange rate changes on the firm’s operating cash flow....
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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