A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days.  The current spot rate is 110 JPY/USD.   The Japanese firm has an asset/liability position in dollars.   The Japanese firm faces the risk that the yen will appreciate/depreciate.   How can the firm hedge this risk (be specific and detailed)?

Q: Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,450,000 and is…

A: The NPV of a project refers to the measure of the project's profitability calculated by discounting…

Q: Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to…

A: Image 1Denver's speculative profit is…

Q: A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State…

A: A hedge fund is defined as an investment fund which generally has liquid assets and utilises complex…

Q: A British firm will receive $1 million from a U.S. customer in three months. The firm is considering…

A: The global market where currencies are traded is known as foreign exchange currency, or forex or FX.…

Q: Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed…

A: Spot rate = $1.05/€1-year Forward rate = $1.10/€Interest rate in US = 6%Interest rate in France =…

Q: A U.S. Company knows that it will have to pay 3 million Euros in three months. The current exchange…

A: Companies involved in international transactions often face the risk of fluctuating exchange rates.…

Q: Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six…

A: To determine where the treasurer of IBM should invest the extra cash reserve to maximize the return…

Q: Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six…

A: Cash reserve = $100,000,000Time for investment = 6 monthsInterest in US = 12% p.aInterest in Germany…

Q: Suppose that the treasurer of IBM has an extra cash reserve of $100, 000, 000 to invest for six…

A: Cash Reserve = $100,000,000United States interest rate = 9% (six-month)Germany interest rate = 8%…

Q: se that a French firm would like to have its stock available through an American Depository Receipt…

A: ADR is the issued by the US bank and are shares of foreign companies with a US equivalent value.

Q: Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.10 million (Fijian…

A: USD needed at depreciated rate= $462,000.00Explanation:Retrojo Inc. would need $462,000.00 (US…

Q: 7.ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its…

A: Forward contract is an agreement which is done between two parties to hedge foreign currency risk.…

Q: A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State…

A: The expected value of the spot rate is the sum product of the probability and the spot rate.

Q: Suppose the current exchange rate between the US dollar (USD) and the euro (EUR) is 1 USD = 0.85…

A: The ability of international investors to swiftly switch between domestic and foreign assets exerts…

Q: Suppose you, a German importer, expect to pay $1 million in 90 days for taking delivery of import…

A:

Q: Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at…

A: When the bills are settled in foreign exchange currency, the company always has a risk of conversion…

Q: Kamada: CIA Japan (A). Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is…

A: Covered interest arbitrage is a strategy in which the investor uses a forward contract to hedge…

Q: Assume your U.S. firm currently has a profit center in Malaysia, receiving a significant number of…

A: If your U.S. firm has a profit center in Malaysia and receives a significant amount of Malaysian…

Q: Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive…

A: Interest rate parity refers to a theory that is used for showing the difference in interest rates…

Q: ose that the current exchange rate between the Japanese yen (¥) and the U.S. dollar ($) is ¥100 =…

A: According to the purchase power parity the prices must be in equilibrium with each other and should…

Q: A U.S. firm holds an asset in France and faces the following scenario:   State 1 State 2 State 3…

A: Probability Spot Rate $/€( State 1 25% 1.28 State 2 25% 1.23 State 3 25% 1.18 State 4 25%…

Q: A U.S. firm holds an asset in France and faces the following scenario: State 2 25% Probability Spot…

A: Exchange exposure is to be calculated by taking the total amount involved in all the transactions as…

Q: 5.ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its…

A: Forward contract is a an agreement between the two parties to sell and buy the underlying assets or…

Q: Kansas Corporation, an American company, has a payment of €5.9 million due to Tuscany Corporation…

A: Scenario 1: Spot Rate = 0.85 €/SStrategy 1: Forward ContractCost of €5.9 million at forward rate:…

Q: You are a U.S. importer and just placed an order of antiques worth £100,000 from a U.K supplier. You…

A: One of the techniques for hedging foreign exchange risk is the money market hedge. It helps to lock…

Q: A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate p*…

A: Exchange exposure can be referred as the risk arises due to the change in the exchange rate while…

Q: Kansas Corp., an American company, has a payment of €5.3 million due to Tuscany Corp. one year from…

A: Amount payable = € 5.3 millionSpot rate = 0.90€ /$Forward rate = 0.89€ /$Strike rate = 0.88€…

Q: ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its…

A: Forward is the contract made by two parties for deferring the transaction but the quantity and…

Q: A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State…

A: Variance helps in understanding the spread of the data from its average. Mean and Variance is…

Q: nishok Equipment has an investment opportunity in Europe. The project costs €17491457 and is…

A: NPV is the main capital budgeting methods used and based on the time value of money and can be found…

Q: U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for…

A: Current rate1US dollar =1.665 franc Future rate 1US dollar =1.6580 Amount 24000 US dollars or 39960…

Q: A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate P* P…

A: Exchange exposure refers to the risk faced by an entity, such as a firm or investor, due to…

Q: You are a U.S. importer and just placed an order of antiques worth £100,000 from a U.K supplier. You…

A: A foreign exchange payment is hedged through an option contract. Total cost of purchase needs to be…

Q: Lambert Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in…

A: Amount paid under forward hedge=Amount payable*forward exchange rate.=66,600/1.822.=$36,553.24

Q: Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to…

A: Denver Financial's speculative profit is NZ$5,486,818.18. They earned on their investment and…

Q: Michelle Co. a US firm, plans to use a money market hedge to hedge its payment of $2,000,000…

A: The objective of this question is to calculate the amount of U.S dollars needed in 1 year if a money…

Q: A Japanese exporter has a €1,000,000 receivable due in one year. To hedge the position, you will buy…

A: A put option is an instrument which provides its holder an option to sell an underlying asset on a…

Q: Kamada: CIA Japan (A). Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is…

A: Covered interest arbitrage is  way to make money by borrowing from a country where interest rates…

Q: Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year)…

A: Foreign exchange rate is the rate at which the currency of one country can be exchanged for another…

Q: The treasurer of a major U.S. firm has $31276878 to invest for three months. The annual interest…

A: Investment amount is $31,276,878 Investment Period is 3 Months U.S Interest Rate is 0.35% per month…

Q: American Pharoah management is planning to make a $ 2.0 million loan to a French firm. Currently,…

A: Loan rate to be charged = LIBOR+ Default risk premium + Foreign exchange rate risk premium + Country…

Q: A US based investor plans to invest $44,400 in Russia, where the interest rate is 6.65%. If the…

A: While investing in other country, first exchange rate shall be applied and then interest rate of…

Q: STEP: 2 of 2 Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$2.00 million…

A: As per the problem, we are required to compute the number of US dollars required to exchange the 2…

Q: Consider the currency risk faced by Walt Disney Company (DIS), which generates revenues from all…

A: Walt Disney can hedge the currency risk by entering into forward contracts to lock-in the exchange…

Q: Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at…

A: Here,ExchangeRate of Yen/$ is ¥100/$Interest Rate of Yen is 6%Interest Rate of Japan is 4%Amount…

Q: Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed…

A: Hedging: This is a risk management strategy employed to reduce or eliminate the possible adverse…

Q: Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot…

A: To implement a money market hedge in this scenario, the U.S. firm can follow the steps below.

Q: A U.S. firm, sells merchandise today to a British company for £100,000. The current exchange rate is…

A: Money market hedge: A money market hedge is a method for controlling exchange rate or currency risk.…

Q: Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,200,000 and is…

A: Initial investment = €15,200,000Cash flow in year 1 = €3,800,000Cash flow in year 2 = €4,800,000Cash…

Q: Consider this case: Sebrele Enterprises Inc. is a U.S. firm evaluating a project in Australia. You…

A: NPV calculation used to evaluate the investment and financing decisions that involve cash flows…

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.