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Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?
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- 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?Suppose that you are a US-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 4.0 percent, and the UK risk-free rate is 30 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $2.10. a. Whether you should use a long or short forward contract to hedge the currency risk O Long position in forward contract O Short position in forward contract b. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 30 days. (Do not round intermediate calculations. Round your answer to 4 decimal places.) No-arbitrage price c. Move forward 10 days. The spot rate is $2.13. Interest rates are unchanged. Calculate the value of your forward position. (Do not round intermediate calculations. Round…The firm you work for is Multinational Widget Inc. You are involved in a fixed-for-fixed currency swap between ¥ and $US. The swap has 5 years left to maturity and a principal of $1 million US or ¥100 million. In the swap, you make annual payments of $80,000 to the bank (and also pay the principal at maturity) and you receive annual payments of ¥10,000,000 per year (and also receive the principal at maturity). Assume that when this swap was set up, it was "at market", meaning that the net value to you was zero. If the current spot rate is 90 ¥/$US, the current interest rate for ¥ is 12% and the current interest rate for $US is 10%, what is the value of your swap position? $4,035.50 US $5,565.250 US $80,345.50 US $90,67.50 US None of these
- 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 BritainCray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging? a. b. Would you recommend hedging this euro…Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,200,000 and is expected to produce cash flows of €3, 800,000 in Year 1, €4, 800,000 in Year 2, and €5, 200,000 in Year 3. The current spot exchange rate is $.83/€ and the current risk - free rate in the United States is 2.6 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 11 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9, 700,000. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
- 4 Assume that Intel has net receivables of SGD1,500,000 in 90 days. The spot rate of the Singapore Dollar (SGD) is USD0.7300, and the Singapore interest rate is 12.00% per annum and US interest rate is at 10.00% per annum. Suggest how the U.S. firm could implement a money market hedge. (Show your strategy and workings).(C) US Bank is considering investing in a three years' project in Europe country. The project would require an initial investment of $750,000 and it is expected to generate €80,000, €100,000 and €150,000 in year one until three, respectively. The business risk will be identical to the firm's existing line of business in the euro-zone, the required rate of return in the euro-zone is 18 percent. The exchange rate is $1.20/€ where the dollar also shows appreciating by one percent for every year. Determine the Net Present Value (NPV) in dollar currency for this project and justify.Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm. The finance manager expects the spot price of the € to remain stable at the current rate of $1.60/€. But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low as $1.50/€. Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures. Six months Call and Put options with an exercise price of $1.60/€ are available. The Call sells for $.08/€ and the Put sells for $.04/€. A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used? assume…
- A large bank is quoting the following spot exchange rates for number of YEN per USD, number of THB per USD and number of YEN per THB respectively. YEN/USD = 116.91 -- 116.95 THB/USD = 44.30 -- 44.40 YEN/THB = 2.6900 -- 2.7100. You are trader at Axe Capital, a US hedge fund, and your job is to try to find arbitrages in the currency markets. You have 10 mio USD risk capital provided by your fund. Using the 10 mio USD risk capital, how much arbitrage (guaranteed risk-free) profit can you make. If there is no arbitrage possible, enter zero. Give your answer in USD to the nearest USD. Please Do your calculation in excel and do not round anything until the very end.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 per month. 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 decimal places, 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 in U.S. dollars? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. a. U.S. investment b. Great Britain investmentFred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.
