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Question 2

AssessingTransaction Exposure Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal DK40,000,000. British pound inflows equal £2,000,000 while out flows equal £1,000,000. The spot rate of the krone is $.15, while the spot rate of the pound is $1.50. Assume that the movements in the Danish krone and the British pound are highly correlated. Provide your assessment as to your firm’s degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer.

Question 31

Exposure of Net Cash Flows Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales if there are any) over the next year. Ignore any tax effects. Each firm has the same level of expected earnings. None of the firms has taken any position in exchange rate derivatives to hedge exchange rate risk. All payments for the international trade by each firm will occur 1 year from today.

Sunrise Co. has ordered imports from Austria, and its imports are invoiced in euros. The dollar value of the payables based on today’s exchange rate) from its imports during this year is $10 million. It has no international sales.

Copans Co. has ordered imports from Mexico, and its imports are invoiced in U.S. dollars. The dollar value of the payables from its imports during this year is $15 million. It has no international sales.

Yamato Co. ordered imports from Italy, and its imports are invoiced in euros. The dollar value of the payables (based on today’s exchange rate) from its imports during this year is $12 million. In addi- tion, Yamato exports to Portugal, and its exports are denominated in euros. The dollar value of the receivables (based on today’s exchange rate) from its exports during this year is $8 million.

Glades Co. ordered imports from Belgium, and these imports are invoiced in euros. The dollar value of the payables (based on today’s exchange rate) from its imports during this year is $7 million. Glades also ordered imports from Luxembourg, and these imports are denominated in dollars. The dollar value of these payables is $30 million. Glades has no international sales.

Based on this information, which firm is exposed to the most exchange rate risk? Explain.

Question 3

Money Market Hedge on Payables Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7 percent over 180 days, and the spot rate of the Mexican peso is $.10. Suggest how the U.S. firm could implement a money market hedge. Be precise

Question 33

Techniques for Hedging Receivables SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in 1 year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by determining the estimate (or probability distribution) of dollar revenue to be received in 1 year for each type of hedge.

                                                         US                   NEW ZELAND

                                                         RATE             PROBABILITY

Question 3

Reducing Economic Exposure Albany Corp. is a U.S.-based MNC that has a large government con- tract with Australia. The contract will continue for several years and generate more than half of Albany’s total sales volume. The Australian government pays Albany in Australian dollars. About 10 percent of Albany’s operating expenses are in Australian dollars; all other expenses are in U.S. dollars. Explain how Albany Corp. can reduce its economic exposure to exchange rate fluctuations.

Question 12

AssessingEconomic Exposure Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and exports them to other countries. It has no other inter- national business. The subsidiary will produce compu- ters and export them to Caribbean islands and will invoice the products in U.S. dollars. The values of the currencies in the islands are expected to remain very stable against the dollar. The subsidiary will pay wages, rent, and other operating costs in Mexican pesos. The subsidiary will remit earnings monthly to the parent.

a. Would Alaska’s cash flows be favorably or unfavorably affected if the Mexican peso depreciates over time?

b. Assume that Alaska considers partial financing of this subsidiary with peso loans from Mexican banks instead of providing all the financing with its own funds. Would this alternative form of financing increase, decrease, or have no effect on the degree to which Alaska is exposed to exchange rate movements of the peso?