Global Finance Assignments 4-6

Q1: Explain the relationship between this chapter on hedging and the previous chapter on measuring exposure.

Q2: Why should an MNC identify net exposure before hedging?

Q3: Assume the following information:

180day U.S. interest rate = 8%

180day British interest rate = 9%

180day forward rate of British pound = $1.50

Spot rate of British pound = $1.48

Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days.  Would it be better off using a forward hedge or a money market hedge?  Substantiate your answer with estimated revenue for each type of hedge.

Q 4: Albany Corp. is a U.S.based MNC that has a large government contract 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.

Q 5: St. Paul Co. does business in the United States and New Zealand.  In attempting to assess its economic exposure, it compiled the following information.

a. St. Paul’s U.S. sales are somewhat affected by the value of the New Zealand dollar (NZ$), because it faces competition from New Zealand exporters.  It forecasts the U.S. sales based on the following three exchange rate scenarios:

Revenue from U.S. Business

Exchange Rate of NZ$ (in millions)

NZ$ = $.48 $100

NZ$ = .50 105

NZ$ = .54 110

b. Its New Zealand dollar revenues on sales to New Zealand invoiced in New Zealand dollars are expected to be NZ$600 million.

c. Its anticipated cost of materials is estimated at $200 million from the purchase of U.S. materials and NZ$100 million from the purchase of New Zealand materials.

d. Fixed operating expenses are estimated at $30 million.

e. Variable operating expenses are estimated at 20 percent of total sales (after including New Zealand sales, translated to a dollar amount).

f. Interest expense is estimated at $20 million on existing U.S. loans, and the company has no existing New Zealand loans.

Forecast net cash flows for St. Paul Co. under each of the three exchange rate scenarios.  Explain how St. Paul's projected net cash flows are affected by possible exchange rate movements.  Explain how it can restructure its operations to reduce the sensitivity of its net cash flows to exchange rate movements without reducing its volume of business in New Zealand.