2. What indicators would you look for in assessing the political riskiness of an investment in Eastern Europe? Assign a value and weight to each of the political risk indicators and compute an index by adding the products of the assigned ratings and weights of each political risk factor.
3. The Swiss Central Bank bans the use of Swiss francs for Eurobond issues. Explain how currency swaps can be used to enable foreign borrowers who want to raise Swiss francs through a bond issue outside of Switzerland to get around this ban.
4. What is translation exposure? Transaction exposure?
5. What are the basic translation methods? How do they differ?
6. In May 1988, Walt Disney Productions sold to Japanese investors a twenty-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6 percent (the return required by the Japanese investors), was ¥93 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 10 percent. According to Disney's chief financial officer, Gary Wilson, "In effect, we got money at a 6 percent discount rate, reinvested it at 10 percent, and hedged our royalty stream against yen fluctuations-all in one transaction."
a. At the time of the sale, the exchange rate was ¥124 = $1. What dollar amount did Disney realize from the sale of its yen proceeds?
b. Demonstrate the equivalence between Walt Disney's transaction and a currency swap. (Hint: A diagram would help.)
c. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction?
7.. Walt Disney expects to receive a Mex$16 million theatrical fee from Mexico in ninety days. The current spot rate is $0.1321/Mex$, and the ninety-day forward rate is $0.1242/Mex$.
a. What is Disney's peso transaction exposure associated with this fee?
b. If the spot rate expected in ninety days is $0.1305, what is the expected U.S. dollar value of the fee?
c. What is the hedged dollar value of the fee?
d. What factors will influence the hedging decision?
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