Tutorial+20+Solution

Tutorial+20+Solution - BUS3026W Finance II 2009 - Tutorial...

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1 BUS3026W Finance II 2009 - Tutorial 20 Suggested Solution Due: Monday 19 th October 09 QUESTION 1 a. The implied exercise (price) rate is: 10,000/15,000 = $0.6667/SF . b. If the Swiss client chooses to pay $10,000, it will cost SF16,129 (=10,000/.62) . Since the Swiss client has an option to pay SF15,000, it will choose to do so. The value of this option is obviously SF1,129 (=SF16,129- SF15,000). c. Baltimore Machinery faces a contingent exposure in the sense that it may or may not receive SF15,000 in the future. The firm thus can hedge this exposure by buying a put option on SF15,000. [2, 2, 2] QUESTION 2 Cross-hedging involves hedging a position in one asset by taking a position in another asset. The effectiveness of cross-hedging would depend on the strength and stability of the relationship between the two assets. [3] QUESTION 3 a. Economic exposure can be defined as the sensitivity of the future home currency value of the firm’s assets and liabilities and the firm’s operating cash flow to random changes in exchange rates. b. The competitive effect: exchange rate changes may affect operating cash flows by altering the firm’s competitive position. The conversion effect: A given operating cash flows in terms of a foreign currency will be converted into higher or lower dollar (home currency)amounts as the exchange rate changes. c. Possible measures that GM can take include: (1) diversify the market; try to market the cars not just in Spain and other European countries but also in, say, Asia; (2) locate production facilities in Spain and source inputs locally; (3) locate production facilities, say, in Mexico where production costs are low and export to Spain from Mexico.
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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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Tutorial+20+Solution - BUS3026W Finance II 2009 - Tutorial...

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