Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 50 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure. To hedge against this translation exposure, Warner decides to sell 50 million euros forward. Warner can then purchase euros at the prevailing spot rate in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.30 and the spot rate for euros currently is also $1.30. Assume that the euro does indeed depreciate to a weighted average exchange rate of $1.20 over the coming year. Warner still must fulfill its forward contract to sell 50 million euros at the forward rate of $1.30. Warner earns $ million from the sale of euros at the forward rate. However, in order to obtain the needed 50 to sell, Warner needs million from this forward contract. million. Thus Warner

Q: Explain compound interest.

A: Compound interest.

Q: Define trade-off theory

A: Answer: The trade-off theory suggests a leveraged company’s valuation is equal to the value of an…

Q: Explain Concept Syndications?

A: Syndication is a process by which small lenders come together and they lend the money to a big…

Q: What is a transfer price?

A: Inter division transactions:  When the different divisions under the same business organization are…

Q: Explain put option

A: Introduction: This question is related to the concept of financial derivatives. Derivative…

Q: Define asymmetric hedge

A: A strategy that helps to reduce the loss which occurs from the movement of the asset's price is term…

Q: What are the CVP assumptions?

A:

Q: What are the assumptions of Walter’s model?

A: The Walter Model of Careers is an influential theory in the field of career development. This model…

Q: Define risk

A: Risk can be defined as whenever there are chances that the investments’ actual outcomes are…

Q: Why is this formula very important F = P( I + i)?

A: Time value of money (TVM) The thought cash you at present have would, later on, be worth more than a…

Q: What is a cross rate?

A: Cross rate is an exchange rate of currency between two countries, but both countries are not using…

Q: Define arbitrage

A: Introduction: Usually, an arbitrage opportunity is used when there is the option of purchasing an…

Q: How do I calculate FIFO and LIFO?

A: Meaning of FIFO:First in first out means if company purchases any goods for sale purpose then…

Q: when NPV is greater than zero the PI will be greater than zero, greater than one, less than one, or…

A: Net present value NPV is a technique used in capital budgeting for evaluating the project's…

Q: Define unlevered beta

A: Unlevered beta can be defined as the ungeared beta of a company which does not take effect of…

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.