An MNC seeking to reduce transaction exposure with a strategy of leading and lagging -can probably employ the strategy more effectively with intra firm payables and receivables than with customers or outside suppliers. Exchange rate risk of a foreign currency payable is an example of -transaction exposure A U.S. firm has sold an italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They paid an option premium of $0.01 per euro. If at maturity, the exchange rate is $1.60. -the firm will realize $1,140,000 on the sale net of the cost of hedging. Your firm is a UK-based exporter of British bicycles. You have sold an order for an Italian firm for € 1 million worth of bicycles. Payments from the Italian firm (in €) in 12 months. Your firm wants to hatch the receivable into pounds. Not dollars. Interest rates are 3 percent in €, 2 percent in $ and 4 percent in £. -Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable, Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at spot, receive £728,155.34. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using the forward hedge is -$6,880,734.
Which of the following options strategies are internally consistent? -sell puts and buy calls, as well as buy puts and sell calls. With any successful hedge, -none of the options A U.S. firm holds an asset in Great Britain and faces the following scenario: Probability State 1 25% State 2 50% State 3 25% Spot rate $2.50/ £ $2.00/ £ $1.60/ £ P* £1,800 £2,250 £2,812.50 P $4,500 $4,500 $4,500 where, P*= Pound sterling price of the asset held by the U.S. firm P= dollar price of the same asset. The expected value of the investment in U.S. dollars is: -$4,500. A U.S. firm holds an asset in Israel and faces the following scenario: Probability State 1 25% State 2 50% State 3 25% Spot rate $0.30/IS $0.20/IS $0.15/IS P* IS2,000 IS5,000 IS3,000 P $600 $1,000 $450 where, P*= Israeli shekel (IS) price of the asset held by the U.S. firm P= dollar price of the same asset. The expected value of the investment in U.S. dollars is: -$762.50 Consider a U.S. - based MNC with a wholly-owned French subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the competitive effect of the depreciation? -The change in the cash flow in euro an alteration in the firm’s competitive position in the marketplace is in part a function of the elasticity of demand for the firm’s product.
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