this assignment due in 3 days

this assignment due in 3 days

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?
operating exposure
accounting exposure
translation exposure
transaction exposure

Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for 25,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

· The spot exchange rate is $1.1740/

· December contracts in CME currently trade at $1.1480/ and the margin requirement
for the contract is $2,000.
· OTI’s cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December call options on Euro: strike price $1.15, premium price is 1.5% of the underlying amount
· OTI’s forecast for 6-month spot rates is $1.19/
· The budget rate, or the highest acceptable purchase price for this project, is $29,750,000 or $1.19/

Assume that OTI treasurers buy a call option on 25m at strike price of 1.5% of the underlying currency . If the spot rate is $1.25/ in December when the payment is due, what would the effective dollar cost of OTI s payable.

$29,750,000
28,309,750
29,190,250

29,216,665

Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for 25,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

· The spot exchange rate is $1.1740/

· December contracts in CME currently trade at $1.1480/ and the margin requirement
for the contract is $2,000.
· OTI’s cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December call options for 62,500; strike price $1.15, premium price is 1.5%
· OTI’s forecast for 6-month spot rates is $1.19/
· The budget rate, or the highest acceptable purchase price for this project, is $29,750,000 or $1.19/

Assume that OTI treasurers enter in a futures contract (each contract 125,000) in June at 1.1480. In December when the payment is due, the futures contract has still two weeks to expiration. Hence, OTI choose to liquidate the contract by reversing it. At the time of liquidation Futures contract trades at 1. 2520 and the spot rate is $1.25/ . OTI liquidates its futures contract and purchases s in the spot market. Calculate the effective dollar cost of OTI s payables.

28,650,000
33,850,000

29,350,000
28,700,000

Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for >1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
· The spot exchange rate is $1.1740/>
· The six month forward rate is $1.1480/>
· Plains States’ cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December put options for >625,000; strike price $1.18, premium price is 1.5%
· Plains States’ forecast for 6-month spot rates is $1.19/>
· The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/>

Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be ________.
$1,435,000
$1,467,500
$1,125,000
$1,425,000

A U.S. firm with no subsidiaries presently has sales to Brazil amounting to R200 million, while its Real -denominated expenses amount to R100 million. If it shifts its material orders from its Brazilian suppliers to U.S. suppliers, it could reduce Real-denominated expenses by R20 million and increase dollar-denominated expenses by $15 million. This strategy would _______ the firm’s exposure to changes in the Real’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the Real is valued _______ relative to the dollar.
reduce; high
reduce; low
increase; low
increase; high

Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency?
Increase sales in this county.
Borrow money in the foreign currency in question.
Increase sales to that country.
Lend money in the foreign currency in question.

Which of the following is NOT a proactive policy for managing operating exposure?

back-to-back loans
matching currency of cash flow
cross currency swap agreements
All of the above are proactive management policies for operating exposure.

A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as ________.
risk-sharing
currency-switching
a natural hedge
matching

Which of the following is NOT an important impediment to widespread use of parallel loans?
The process does not avoid exchange rate risk
The risk that one of the parties will fail to return the borrowed funds when agreed.
Difficulty in finding an appropriate counterparty.
All of the above are significant impediments.

A balance sheet hedge is the main technique for managing ________ risk.
operating
money market
transaction
translation

Is this the question you were looking for? If so, place your order here to get started!