Discuss the implications of purchasing power parity for operating exposure

# Discuss the implications of purchasing power parity

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6. Discuss the implications of purchasing power parity for operating exposure. 7. General Motors exports cars to Spain but the strong dollar against the euro hurts sales of GM cars in Spain. In the Spanish market, GM faces competition from the Italian and French car
makers, such as Fiat and Renault, whose operating currencies are the euro. What kind of measures would you recommend so that GM can maintain its market share in Spain. 8. What are the advantages and disadvantages of financial hedging of the firm’s operating exposure vis-à-vis operational hedges (such as relocating manufacturing site)? Chapter 9 – Problems 1. Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth \$1.40. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the pound will be stronger, i.e., \$1.50/£. You feel that the British economy will experience a boom with a 60% probability and a slow-down with a 40% probability. (a) Estimate your exposure b to the exchange risk. (b) Compute the variance of the dollar value of your property that is attributable to the exchange rate uncertainty. (c) Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.

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• Spring '11
• SamiqueMarch
• Exchange Rate, United States dollar, Forward contract, Spot price