U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 9%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
Question 2: Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90 day forward rate is $.645. Kramer has developed the following probability distribution for the spot rate in 90 days:
Possible Spot Rate
in 90 Days Probability
The probability that the forward hedge will result in more dollars received than not hedging is:
Question 3: FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.70, what is the net amount paid, assuming FAB wishes to minimize its cost?
Question 4: Samson Inc. needs 1,000,000 in 30 days. Samsong can earn 6 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 5 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.?
Question 5. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it _______ determine which hedge is preferable before implementing the hedge. It _______ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
Question 6: Springfield Co., based in the U.S., has a cost from orders of foreign material that is less than its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would _______ a stronger dollar and would _______ a weaker dollar.
A) benefit from; be unaffected by
B) benefit from; be adversely affected by
C) be unaffected by; be adversely affected by
D) be unaffected by; benefit from
E) be adversely affected by; benefit from
Question 7: Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso denominated expenses amount to MXP61 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso denominated expenses by MXP19 million and increase dollar denominated expenses by $1,800,000. This strategy would _______ the Sycamore's exposure to changes in the peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued _______ relative to the dollar.
A) reduce; high
B) reduce; low
C) increase; low
D) increase; high
Question 8: Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation _______, which would be _______ than the gain generated by the forward contract.
A) loss; smaller
B) loss; larger
C) gain; larger
D) gain; smaller
Question 9: Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:
A) closing down most of its plants in the U.S.
B) producing more automobiles in the U.S.
C) relying completely on Japanese suppliers for its parts.
D) pricing its exports in dollars.
Question 10. If countries are highly influential upon each other, the correlations of their economic growth levels would likely be _______. A firm would benefit _______ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.
A) high and positive; more
B) close to zero; more
C) high and positive; less
D) close to zero; less
Question 11: Which of the following firms is not exposed to translation exposure?
A) firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent.
B) firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden; the parent covers at least some of these losses.
C) firm Z, with a fully owned subsidiary that generates substantial earnings in Germany; the subsidiary never remits earnings but reinvests them in Germany.
D) all of these firms are exposed to translation exposure.
Question 12: Consider Firm "A" and Firm "B" that both produce the same product. Firm "A" would more likely have more stable cash flows if its percentage of foreign sales were _______ and the number of foreign countries it sold products to was _______.
A) higher; large
B) higher; small
C) lower; small
D) lower; large
Question 14. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:
A) a risk adjusted discount rate.
B) payback period.
C) certainty equivalents.
Question 15: Direct foreign investment is perceived by foreign governments to:
A) be a cause of national problems.
B) be a remedy for national problems.
C) be a cause and a remedy for national problems.
D) have no impact on national problems.
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