pre class quizz #7

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Question 5?

ABC Co. expects a payment from an American customer in 30 days. To hedge its currency exposure, ABC Co. shoulda. Sell dollars forward 30 days.b. Buy dollars forward 30 days.c. Sell pesos forward 30 days.d. Do nothing as there is no foreign exchange rate exposure for a 30 day time horizon.

Identify what transaction risk management is done in the following cases: (A) ABC Corporation will only accept P200,000 or its equivalent on the payment date despite having a USD4,000 sale. (B) ABC Corporation pays a foreign-currency denominated purchase early when it sees that the Philippine peso will decrease in value.a. Invoicing in home currency; Leadingb. Forward contract; Leadingc. Invoicing in home currency; Laggingd. Forward contract; Lagging

A multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollars

If a French citizen deposits $10,000 in Chase Bank inNew York, have Eurodollars been created? What if the deposit is made inBarclays Bank in London? Chase’s Paris branch? Does the existence of theEurodollar market make the Federal Reserve’s job of controlling U.S. interest rates easier or more difficult? Explain.

PROBLEM SOLVING (MCQ) The TAGALOG CORPORATION purchases merchandise from a foreign exporter on November 15, 2014 for FC 100,000, payable in that currency on January 15, 2015. TAGALOG predicts the Philippine peso might probably weaken against the foreign currency over the 60-day period and entered into a hedge of the exposed foreign currency amount against the risk of exchange losses. The hedging relationship was designed in a way that it would be fully effective thru the entire hedge period, and selected a forward contract for that purpose. The following are relevant spot and forward rates at selected dates. 11/15/14 12/31/14 01/15/15 P0.4345 Spot rates P0.4295 P0.4245 Forward rates P0.4325 PO.4300 P0.4345 1. How much should TAGALOG CORPORATION report as transaction gain or (loss) on its Accounts payable (in FC) at December 31, 2014 (its current year-end)? A. P(300) C. P250 B. P(250) D. P500

P15–14 Integrative: Comparison of loan terms  Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalent revolving credit agreement, the rate is 2.80% over prime with a commitment fee of 0.50% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. (Note: Cumberland currently maintains $0 on deposit at the bank.) The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan agreement it decides to use. What is the effective annual rate under the line of credit? What is the effective annual rate under the revolving credit agreement? (Hint:Compute the ratio of the dollars that the firm will pay in interest and…

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Suppose the Japanese yen exchange rate is ¥116/$ and the British pond exchange rate is $1.27/£. a) What is the yen to pound cross-rate? b) Suppose that a bank gives you a quote of ¥156/£. Is there an arbitrage opportunity here? If so, explain how to take advantage of the mispricing.

b. Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars? Write an example.

M7 Question 8 (B)