The treasurer of a major U.S. firm has $38 million to invest for three months. The interest rate in the United States is .55 percent permonth. The interest rate in Great Britain is .59 percent per month. The spot exchange rate is £.76, and the three-month forward rate is£77. Ignore transaction costs.a. If the treasurer invested the company's funds in the U.S., how much would the investment be worth after three months?Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.b. If the treasurer invested the company's funds in Great Britain, how much would the investment be worth after three months inU.S. dollars?Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.a. U.S. investmentb. Great Britain investment

1 a. U.S. InvestmentWorth of the investment after 3 months = 38000000 x (1.0055)^3= $30497727.49 1…

Answered: The treasurer of a major U.S. firm has…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier and must pay US $4 million in three month time. The company finance director wishes to hedge against the foreign exchange risk and is considering 3 methods. Using forward exchange contract Using the money market hedge Using lead payment The annual interest rate and exchange rates are given below; US S UK £ Deposit Rate 1 month 7% Borrowing rate 10.25% Deposit Borrowing 10.75% 3 month 7% 10.75% 4% 14% 4.25% Spot rate £:1 : $ 1.8625 1.8635 1 month forward 0.6-0.58 cents premium 3 months forward 1.80 1.75 cent premium Advice the company on the best method to use. (Show all your workings) [12 marks]
IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥210 million payable in three months. Currently, the spot USD/JPY rate is 108 and the three-month forward rate is 103. The three-month money market interest rate is 4.6 percent per annum in the U.S. and 2.4 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable. Calculate today's dollar cost of meeting this yen obligation. (USD, no cents)
Consider the currency risk faced by Walt Disney Company (DIS), which generates revenues from all over the world. One of its biggest sources of income is Tokyo Disney. The firm expected to receive ¥500 mln from its Tokyo operation in three months and another ¥500 min in six months. It would like to lock in the exchange rate on these two cash flows and thereby eliminate the risk of an unfavorable move in exchange rates. The investment banker indicates that the three-month forward $/ rate is 0.009123. The investment banker also offers a six-months forward contract at a rate 0.009178 $/¥. What hedging strategy Disney will take? How much home currency will the company receive from its operation in Tokyo in six months?
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2. Money Market Hedge on Receivables Assume that Parker Company will receive 200,000 Canadian dollars in 360 days. Assume the following interest rates: 360-day borrowing rate 360-day deposit rate U.S. 6% 4% Canada 5% 3% Assume the forward rate of the Canadian dollar is $.80 and the spot rate of the Canadian dollar is $.78. If Parker Company uses a money market hedge, how much U.S. dollars will it receive in 360 days from its Canadian dollar receivable? (round to whole dollars) (2 points)
The treasurer of a major U.S. firm has $22 million to invest for three months. The interest rate in the United States is .22 percent per month. The interest rate in Great Britain is .27 percent per month. The spot exchange rate is £.622, and the three-month forward rate is £.624. Ignore transaction costs. What would be the value of the investment in three months if the money is invested in the U.S. or if it is invested in Great Britain? (Do not round intermediate calculations and enter your answers in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) U.S. Great Britain
The treasurer of a major U.S. firm has $41571485 to invest for three months. The annual interest rate in the United States is 0.25% per month. The interest rate in Great Britain is 0.63% per month. The spot exchange rate is £0.72, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.?
IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is #105/$ and the three-month forward rate is ¥100/$. The three-month money market interest rate is 8 percent per annum in the United States and 7 percent per annum in Japan. The management of IBM decided to use a money market hedge to deal with this yen account payable. a. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation. b. Conduct a cash flow analysis of the money market hedge.
A bank in London, Ontario charges 2.50% commission to buy and sell currencies. Assume that the current exchange rate is US$1 = C$1.3599. a. How many Canadian dollars will you receive from the bank if you sell US$1,340? Round to the nearest cent b. How much commission will you pay the bank for this transaction? Round to the nearest cent
Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥250 million The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥96 = $1. The current interest rate on one-year U.S. Treasury bills is 6%, and on one-year Japanese government bonds the interest rate is 4%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need to exchange today in order to have ¥250 million in one year. (Round your response to the nearest dollar)
James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate Six-month forward exchange rate Dollar interest rate Swiss franc interest rate a. Is the interest rate parity holding? You may ignore transaction costs. Yes Ο NO SFrl.2066/$ SFr1.1937/$ 2.50% per year 2.00% per year Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.06 per dollar and the six-month forward exchange rate is €1.04 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return? Better investment

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