Yankee Company Ltd. is a U.S. based company that has plans to borrow EUR 10 million to fund increased working capital to boost sales of its product in Europe. The company expects Euro interest rates to rise so it enters into a 3X9 Forward Rate Agreement (FRA) to lock in the interest rate it will pay on its Euro borrowing. The current borrowing rate on the contract date is 3.5%. The borrowing rate on the rc. settlement date rises to 3.8%. rs Required: a) Calculate the amount that Yankee Co. needs to pay to settle the FRA on the settlement date b) Yankee Co. management subsequently decides to extend its Euro borrowings for a year as its increased working capital in Europe has increased sales and profits. Yankee's main bank which funds its European operations offers it a one-year loan of Eur 10 million at a floating rate of interest of one-year Euro Interbank Offered Rate (Euribor) plus 3.5%. Yankee Co. prefers to pay a fixed rate of 3.25%. It enters into a swap agreement with a counterparty to lock in the fixed rate for a year. If the one-year Euribor reference rate is 0.05% at the end of the year, which party will settle the difference and what will the settlement amount be?

Yankee Company Ltd. is a U.S. based company that has plans to borrow EUR 10 million to fund increased working capital to boost sales of its product in Europe. The company expects Euro interest rates to rise so it enters into a 3X9 Forward Rate Agreement (FRA) to lock in the interest rate it will pay on its Euro borrowing. The current borrowing rate on the contract date is 3.5%. The borrowing rate on the rc. settlement date rises to 3.8%. rs Required: a) Calculate the amount that Yankee Co. needs to pay to settle the FRA on the settlement date b) Yankee Co. management subsequently decides to extend its Euro borrowings for a year as its increased working capital in Europe has increased sales and profits. Yankee's main bank which funds its European operations offers it a one-year loan of Eur 10 million at a floating rate of interest of one-year Euro Interbank Offered Rate (Euribor) plus 3.5%. Yankee Co. prefers to pay a fixed rate of 3.25%. It enters into a swap agreement with a counterparty to lock in the fixed rate for a year. If the one-year Euribor reference rate is 0.05% at the end of the year, which party will settle the difference and what will the settlement amount be?

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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On April 1, 2017, Mendoza Company borrowed 508,000 euros for one year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the loan on October 1, 2017 and will make a second interest payment on March 31, 2018 when the loan is repaid. Mendoza prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 euro: April 1, 2017 $ 1.10 October 1, 2017 1.20 December 31, 2017 1.24 March 31, 2018 1.28
Use the following information for Problems 11 and 12.MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2017, with payment of 10 million South Korean won to be received on March 31, 2018. The following exchange rates apply:MNC’s incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.Assuming that MNC entered into a forward contract to sell 10 million South Korean won on December 1, 2017, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2017 resulting from a fluctuation in the value of the won?a. No impact on net income.b. $58.80 decrease in net income.c. $2,000 decrease in net income.d. $1,941.20 increase in net income.
Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. S_0 (EUR/AUD) 0.60 Se (EUR/AUD) 0.50 (0.3) and 0.65 (0.7) Premium on AUD call option R = EUR0.02 Exercise exchange rate E = 0.62 Time to expiry 3 months What is the expected value of payables in AUD under hedge Will the option to hedge be undertaken on the basis of expected spot rate? Explain.
Company A (a U.S. MNC) wants to borrow £10,000,000 at a fixed rate for five year. Company B (a U.K. MNC) wants to borrow $16,000,000 at a fixed rate for five year. Today's exchange rate is £1- $1.6. The information below summarizes what each company can do without using swaps. Company A Company B $ Loans 8 10.6 £ Loans 11.6 12.4 If Company A wants to save 0.3% of the £10,000,000 loan through a Swap Bank, and If Company B wants to save 0.2% of the $16,000,000 loan through a Swap Bank. How much can the Swap bank earn on pound (£) loans (in terms of %) after meeting Company A and Company B's demand? (if your answer is 1.34%, just enter "1.34". If your answer is -1.34%, just enter"-1.34").
The current spot rate is $0.80/A$ and the six-month forward rate is $0.7775/A$. One-year interest is 8% in the United States and 9% in Australia. An investor can borrow up to $ 500,000 or A$625,000, the dollar equivalent at the spot rate. a) Determine if IRP is holding between Australia (A$) and USA ($) b) If IRP does not exist, explain briefly how an investor would realize certain arbitrage profit in U.S. dollar terms. c) Explain (briefly) how IRP will be restored as a result of the arbitrage transactions investors carry out above. (Hint to answer : As more investors buy _____(A$ or $) at spot price, _____(A$ or $) will appreciate and hence, the spot price $0.80/A$ will increase so that the interest rate parity is restored.)
Analyse the scenario below. In each case, explain your reasoning Suppose that the current EUR/GBP exchange rate is £0.92 per euro. The current2-year interest rates are: GBP 4%, EUR 5%. Suppose further that you can use a 2-year forward contract with a EUR/GBP rate of £0.91 per euro. Could this contractbe used for an arbitrage opportunity? If yes, provide an example. Calculatearbitrage profit and explain how this profit can be earned
The annual interest rate in Canada is 1.5%, the comparable rate in Europe is 1% and the spot rate for the EUR is CAD 1.4390 /EUR.a.) If covered interest parity holds, what should be the 90 day forward rate?b.) Now assume a Canadian importer is expecting a shipment of goods worth EUR 30 million from France in 90 days which he needs to pay for in EUR and he wants to hedge his exchange rate exposure by using a forward contract. What will be his cost in CAD if he uses a forward contract to hedge is exposure? How much does he lose/gain if the spot rate would rise to CAD 1.4525 /EUR respectively fall to CAD 1.4275 /EUR in the case with the hedge compared to if he just would have waited and purchased the EUR at the then prevailing spot rate? Please state the hypotheticalgains/losses in CAD.c.) What could potentially be the largest loss (expressed in CAD) he could make with the forward contract if the exchange rate could move to very extreme values during this period?
Assume the spot rate between the uk and the US is .€ .6789= $1 while the one year Foward rate is €.6782=$1. The risk free rate in the UK is 3.1 percent. The risk free rate in the U.S is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest abitrage?
The spot foreign exchange rate for the US dollar is 0.69056 Euros. Yourcompany agrees to pay a bank 63,694 Euros in 3 months in exchange for 100,000US dollars. This is a foreign currency forward contract. No cash is exchanged upfront. Give the underlying asset, the maturity date, and the forward rate (for theUS dollar). Compare to the spot forward rate. Conclude
Goodyear, a U.S. firm, sells tires to Airbus UK, and will receive payment of £1,000,000 in one year. Goodyear's bank quotes the information below: o The spot exchange rate is o The 1-year interest rate on dollars is ius = 2.00% e$/£ $1.50/£ %3D o The 1-year interest rate on pounds is iUK = 5.50% o The 1-year forward rate on pounds is fs/£ = $1.45/£ %3D In addition, Goodyear contacts private forecasters in the market and concludes: o The 1-year-ahead expected exchange rate on the Pound is eex £ = $1.40/£
OneUSF, a U.S. MNC based in Florida, is considering making a fixed direct investment in Italy. The Italian government has offered OneUSF a concessionary loan of €2,700,000 at a rate of 3 percent per annum. The current spot rate is $1.31/€1.00 and the expected inflation rate is 2.5% in the U.S. and 2% in Italy. The normal borrowing rate is 6 percent in dollars and 5.5 percent in euros. The loan schedule calls for the principal to be repaid in three equal annual installments. The marginal corporate tax rate in Italy and the U.S. is 35%. What is the present value of the benefit of the concessionary loan? W $143.174 $984,145 $111,756 None of the above with the $10,000 of the correct answer $1,131,289
Assume the following information regarding U.S. and European annualized interest rates: Currency U.S. Dollar ($) 4.5% Investment Rate Borrowing Rate 5.5% Euro (€) 5.1% 6.3% Golden R Inc. can borrow either $6 million or €5 million. The current spot rate of the euro is $1.02. Furthermore, Golden R Inc. expects the spot rate of the euro to be $1.35 in 60 days. What is Golden R. Inc.'s dollar profit from speculating if the spot rate of the euro is indeed $1.35 in 60 days? Your answer should be whole US dollars. No decimals.

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