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Question;1. Oregon Transportation Inc. (OTI) has;just signed a contract to purchase light rail cars from a manufacturer in;Germany ?2,500,000. 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 $.8924/?;The six month forward rate is $.8750/?;OTI?s cost of capital is 11%;The Euro zone 6-month money market rates;are 7%-9% pa;The U.S. 6-month money market rates are 6%-;8% pa;The premium (option price) for December;call options with strike price $.90 is 1.5%;OTI?s forecast for 6-month spot rates is;$.91/?;The budget rate, or the highest acceptable;purchase price for this project, is $2,300,000 or $.92/?;Assume that analysts consider the following;likely exchange rate scenarios each with an equal probability of occurance;(i.e. 33.3%);Strong Dollar: $0.8600;Neutral:$0.8750;Weak Dollar:$0.9500;Assume that Oregon selected to use forward;hedge. What will be the expected cost of the rail cars? (Hint: Use statistical;expectation to calculate the expected cost);A.;$2,150,000;B.;2,160,527;C.;2,241,778;D.;$2,187,500;E.;$2,350,000;2. Firm;J" is a U.S.-based MNC with net cash inflows of German marks and net;cash inflows of Sunland francs. These two currencies are highly negatively;correlated in their movements against the dollar. Firm "K" is a;U.S.-based MNC that has the same exposure as Firm "J" in these;currencies, except that its Sunland francs represent cash outflows. Which firm;has a higher exposure to exchange rate risk? a. Firm "J". b. Firm;K". c. Firms "J" and "K" have about the same;level of exposure. d. Neither firm has any exposure.;A.;Firm "J".;B.;Firm "K".;C.;J and K have same level of;exposure;D.;Neither firm has any exposure;3. Annual inflation rates in the US and;Turkey were 2% and 20% and 3% and 10% in 2003 and 2004 respectively. The spot;rate for the New Turkish Lira (TRY) was is 1.55 per dollar in January 2003.;Calculate the expected PPP implied USD/TRY;exchange rate as of end of 2004.;A.;USD/TRY1.8555;B.;USD/TRY1.9475;C.;USD/TRY1.7878;D.;USD/TRY 2.1010;E.;USD/TRY2.30;4. The following spot and interest rates to;answer the following question;USD/EURO 1.2310-1.2340;R-USD-3-months: 3.00%-3.25% pa;R-EUR-3-months: 4.00%-4.50% pa;Assume that you are a banker and you bought;Eur100m forward based on the forward price calculated from rates available;above. However, after you entered into the contract, you did not engage in the;series of transactions that you supposed to (in order to create a risk free;position). In other words, you have a net exposure of EUR100m. Suddenly three;months later Fed dramatically increased interest rates, which pushed the;reference rates up by 2% in US. In response to interest rate hike, USD/EUR rate;also moved down to: USD/EUR1.2050-1.2090. Concerned about further movements in;the interest and exchange rates, you completed the loop by borrowing in Euros;converting them into USD and depositing dollars into an interest earning;account (all with 9 months maturity). What would be your net loss or gain With;these sharp movements in interest rates, how much money would your bank lose or;gain because of the forward contract you quoted based on the given rate?;A.;Gain 2,700,000;B.;Loss, 2,700,000;C.;Gain 3,452,366;D.;Loss, 3,451,366;E.;None of the above;5. P&G is a US based MNC and has;operations in Germany. P&G expects 120,000,000 DEM cash flows in 6 months;however due to significant volatility, cash flows are expected to fluctuate as;much as 20%. In other words P&G can get DEM120m, DEM96m or DM144m depending;on the economic conditions. Based on their expectations, P&G treasurers;choose to sell DEM96m forward at DEM1.90and buy DEM48m put option at DEM1.90;both with six month maturities. The cost of the put option is $0.02. Assume;that the spot exchange rate turns out to be DEM2.10/USD at the expiration and;cash flows materialize as DEM144,000,000. What will the net USD cash-flows of;P&G and what will be the cost of acquiring one US dollar?;A.;50,526,316 and DEM1.9000/USD;B.;25,263,158 and EM1.9200/USD;C.;74,829,474 and 1.924;D.;none of the above;6. Sony of Japan produces DVD players and;exports them to the United States. Last year the exchange rate was 135/$ and;Sony charged $145 per DVD player. Currently the spot exchange rate is 105/$ and;Sony is charging $175 per DVD player. What is the degree of pass through by;Sony of Japan on their DVD players?;A.;86.7%;B.;72.4%;C.;73.2%;D.;27.58%;7. Oregon Transportation Inc. (OTI) has;just signed a contract to purchase light rail cars from a manufacturer in;Germany ?2,500,000. 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 $.8924/?;The six month forward rate is $.8750/?;OTI?s cost of capital is 11%;The Euro zone 6-month money market rates;are 7%-9% pa;The U.S. 6-month money market rates are 6%-;8% pa;The premium (option price) for December;call options with strike price $.90 is 1.5%;OTI?s forecast for 6-month spot rates is;$.91/?;The budget rate, or the highest acceptable;purchase price for this project, is $2,300,000 or $.92/?;Assume that analysts consider the following;likely exchange rate scenarios each with an equal probability of occurance;(i.e. 33.3%);Strong Dollar: $0.8600;Neutral:$0.8750;Weak Dollar:$0.9500;Assume that Oregon selected to use December;call option.What will be the expected cost of the rail cars? (Hint: Use;statistical expectation to calculate the expected cost);A.;$2,156,760;B.;$2,182,450;C.;$2,160,527;D.;$2,241,778;E.;$2,187,500;8. A US company;expects SFR120m cash flow 12 months from now. However the exact amount may vary;+/-20%. Company develops an analysis to decide on the best hedging strategy.;They forecast that spot exchange rate can be either SFR1.2030, 1.375 or;1.5470. They consider selling SFR 96m forward @1.375 and buying SFR48m put;option @ strike price SFR1.375/$. They pay $0.0345 per SFR. Assume that actual;cash flows turned out to be SFR120m. Calculate the net USD receipts if spot;rate is SFR 1.5470/USD;A.;87,557,374;B.;89,213,374;C.;69,818,193;D.;None of the above;9. 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/;If Plains States locks in the forward hedge;at $1.1480/, and the spot rate when the transaction was recorded on the books;was $1.174/, this will result in a "foreign exchange loss" accounting;transaction of ________.;A.;There is not enough information;to answer this question.;B.;$0;C.;$32,500;D.;This was not a loss, it was a;gain of $32,500.;10. ABC International treasurers entered;into a range forward contract (also called zero cost cylinder). The contract;requires Purchase of a euro put option for Eur100m at a strike price;USD/EUR1.2800 and sale of Eur100m call option at a strike price of USD/EUR;1.3500. The premium paid for the put option is $0.01. What would be the net USD;receipts of the ABC if the spot rate is USD/EUR1.2930?;A.;128,000,000;B.;135,000,000;C.;129,300,000;D.;128,300,000;E.;There is not sufficient;information to calculate the effective receipt.;11. Assume that Fisher Effect holds. Based on the following market;information for Argentina and US, calculate the One-Year "t-bill;rate for US (Do not use the approximation).;Argentina;Spot Rate:ARP;3.4375/USD Expected inflation;rate: 8.00% p.a. 1-Year Treasury Bill Yield: 11.00% pa;United States;Spot Rate: USD;0.2909/ARP Expected Inflation: 2.00%;p.a.;1 Year Treasury;Bill Yield:?;A.;5.83%;B.;2.77%;C.;3.77%;D.;4.83%;12. Last week;ABCLandLira-US dollar exchange rate moved from ABCL687,000/USD to;ABCL1,072,000/USD. Calculate the depreciation of ABCLand lira visa vie US;dollar. a-56.00% b- 65.00% c-35.91% d-none of the above;A.;35.91%;B.;56%;C.;35.91%;D.;none of the above;13. Oregon;Transportation Inc. (OTI) has just signed a contract to purchase light rail;cars from a manufacturer in Germany ?2,500,000. 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 $.8924/?;The six month;forward rate is $.8750/?;OTI?s cost of;capital is 11%;The Euro zone;6-month money market rates are 7%-9% pa;The U.S. 6-month;money market rates are 6%- 8% pa;The premium;(option price) for December call options with strike price $.90 is 1.5%;OTI?s forecast;for 6-month spot rates is $.91/?;The budget rate;or the highest acceptable purchase price for this project, is $2,300,000 or;$.92/?;Assume that;analysts consider the following likely exchange rate scenarios each with an;equal probability of occurance (i.e. 33.3%);Strong Dollar;$0.8600;Neutral:$0.8750;Weak Dollar;$0.9500;Assume that;Oregon selected to use money market hedge.What will be the expected cost of the;rail cars? (Hint: Use statistical expectation to calculate the expected cost);A.;2,150,000;B.;2,187,500;C.;2,231,500;D.;2,241,778;14. Copy of 7- A US based speculator wanted;to take advantage of high domestic interest rates in ABC-Land. One month;ABC-Land treasuries offered 40% pa interest while speculator's US dollar cost;was only 20%pa. Speculator bought $10,000,000 equivalent of one-month maturity;ABC-Land treasuries when the exchange rate was at ABCL687. Speculator expected;a slight depreciation to ABCL690 since ABC-Land was under a crawling peg;exchange rate regime. However, a political crisis led ABC-Land to abandon the;crawling peg and currency was floated. At the maturity of treasury (in one;month) ABCLand Lira was trading at ABCL1,200/USD. Calculate the loss of the;speculator?;A.;-$5,915,833;B.;-$10,166,667;C.;-$4,250,833;D.;none;15. Oregon;Transportation Inc. (OTI) has just signed a contract to sell light rail cars to;a manufacturer in Germany for 2,500,000.;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/ ?;? The six month;forward rate is $1.1480/?;? 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 put;options for 625,000, strike price $1.18;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 $2,975,000;or $1.19/ ?;If OTI chooses to;hedge its transaction exposure in the forward market, the company will;2,500,000 forward at a rate of;A.;buy, $1.174;B.;sell, $1.148;C.;buy, $1.148;D.;sell, ? 1.174;16. TropiKana;Inc. has just borrowed? 1,000,000 to;make improvements to an Italian fruit plantation and processing plant. If the;interest rate is 5.00% per year and the Euro depreciates against the dollar;from $1.15/? at the time the loan;was made to $1.12/?at the end of the first;year, how much interest and principle will TropiKana pay at the end of the;first year if they repay the entire loan plus interest (rounded)?;A.;$937,500;B.;$1,176,000;C.;?937,500;D.;$1,050,000;17. 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 $1.19/ ?;? 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 $1.1480/?;? The budget;rate, or the lowest acceptable sales price for this project, is $1,425,000 or;$1.14/?;Plains States;would be ________ by an amount equal to ________ with a forward hedge than if;they had not hedged and their predicted exchange rate for 6 months had been;correct.;A.;better off, $52,500;B.;worse off, $10,000;C.;better off, $10,000;D.;worse off, $52,500;18. Annual;inflation rates in the US and Turkey were 2% and 20% and 3% and 10% in 2003 and;2004 respectively. The spot rate for the New Turkish Lira (TRY) was is 1.55 per;US Dollar in January 2003.;The actual spot;rate observed on January 1st 2005 was USD/TRY1.35. Based on the PPP;expectations which one of the following is a correct statement?;A.;Turkish Lira is undervalued;B.;USD is overvalued;C.;Turkish Lira is supervalued;D.;Turkish Lira is overvalued;E.;None of the above;19. Suppose that;on January 1st the annual cost of borrowing in Swiss Francs is 5%. The spot;rate of USD on January 1st is CHF/USD0.98. Six month forward rate was quoted as;CHF/USD 0.95. What is the Swiss Franc cost of borrowing in USD?;A.;8.32%;B.;5%;C.;4.5%;D.;3.72%;E.;None of the above;20. Suppose;annual inflation rates in the US and Mexico are expected to be 3% and 10%;respectively, over the next two years. If the current spot rate for the;Peso/USD is P12/USD, then relative purchasing power parity suggests that the;exchange rate in three years will be approximately _________.;A.;P14.62;B.;12.82;C.;P13.69;D.;None of the above;21. Use the;following data to calculate the Net Change in Reserves for Dotcomland;Private Savings;300bn;Private;Investments 310bn;Government;Revenues 400bn;Government;Expenditures 430bn;Net Statistical;Discrepancy -10bn;Capital Account;+70bn;A.;120bn;B.;60bn;C.;70bn;D.;20;E.;none of the above;22?Suppose you work for XYZLand-Citicorp in XYZLand. A local bank;wanted to buy USD50,000,000 three month forward. Since you think XYZLand is a;very risky environment you need to built 10% margin (annual) in your forward;price to account for risk. Current spot and interest rates in USD and XYZLand;Lira are as follows. What would be your forward quote?;XYZ currency/USD;685-700;RUSD: 7.50-8.50;p.a.;RXYZL:35.00-45.00%;p.a.;A.;783.5;B.;764.4;C.;840.4;D.;none of the above;23. Oregon;Transportation Inc. (OTI) has just signed a contract to purchase light rail;cars from a manufacturer in Germany for 2,500,000. 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/?;? The six month;forward rate is $1.1400/?;? 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 put;options for 625,000, strike price $1.18;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 $2,975,000;or $1.19/?;If OTI locks in;the forward hedge at $1.140/?, and the spot;rate when the transaction was recorded on the books was $1.178/?, this will result in a "foreign exchange ________;accounting transaction of ________.;A.;loss, $95,000;B.;gain, ?95,000;C.;gain, $95,000;D.;loss, ?95,000

 

Paper#49032 | Written in 18-Jul-2015

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