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strayer university finc535 Week 10 Homework




Question;Week 10 Homework;International Finance, FIN: 535;Strayer University;2013;14.;Letters of Credit.Ocean Traders;of North America is a firm based in Mobile, Alabama, that specializes in;seafood exports and commonly uses letters of credit (L/Cs) to ensure payment.;It recently experienced a problem, however. Ocean Traders had an irrevocable;L/C issued by a Russian bank to ensure that it would receive payment upon;shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its;obligation, however, stating that it was not authorized to guarantee commercial;transactions.;a. Explain how an irrevocable;L/C would normally facilitate the business transaction between the Russian;importer and Ocean Traders of North America (the U.S. exporter).;b. Explain how the;cancellation of the L/C could create a trade crisis between the U.S. and;Russian firms.;c. Why do you think;situations like this (the cancellation of the L/C) are rare in industrialized;countries?;d. Can you think of any;alternative strategy that the U.S. exporter could have used to protect itself;better when dealing with a Russian importer?;Small Business;Dilemma;Ensuring;Payment for Products Exported by the Sports Exports Company;1. How could Jim use a letter of credit to;ensure that he will be paid for the products he exports?;2. Jim has discussed the possibility of;expanding his export business through a second sporting goods distributor in;the United Kingdom, this second distributor would cover a different territory;than the first distributor. This second;distributor is only willing to engage in a consignment arrangement when selling;footballs to retail stores. Explain the;risk to Jim beyond the typical types of risk he incurs when dealing with the;first distributor. Should Jim pursue;this type of business?;15. Probability Distribution;of Financing Costs. Missoula, Inc., decides to borrow Japanese yen for one year.;The interest rate on the borrowed yen is 8 percent. Missoula has;developed the following probability distribution for the yen?s degree of;fluctuation against the dollar;Possible Degree of;Fluctuation of Percentage;Yen Against the Dollar Probability;?4% 20%;?1% 30%;0% 10%;3% 40%;Given this information, what is the;expected value of the effective financing rate of the Japanese yen from the;U.S. corporation?s perspective?;16. Analysis of Short-term;Financing.Jacksonville;Corp. is a U.S.?based firm that needs $600,000.;It has no business in Japan but is;considering one?year financing with Japanese yen, because the annual interest;rate would be 5 percent versus 9 percent in the United States. Assume;that interest rate parity exists.;a. Can Jacksonville benefit from borrowing;Japanese yen and simultaneously purchasing yen one year forward to avoid;exchange rate risk? Explain.;b. Assume that Jacksonville does not cover;its exposure and uses the forward rate to forecast the future spot rate.;Determine the expected effective financing rate. Should Jacksonville;finance with Japanese yen? Explain.;c. Assume that Jacksonville does not cover;its exposure and expects that the Japanese yen will appreciate by either 5;percent, 3 percent, or 2 percent, and with equal probability of each;occurrence. Use this information to determine the probability;distribution of the effective financing rate. Should Jacksonville finance;with Japanese yen? Explain.;17. Financing With a;Portfolio.Pepperdine;Inc., considers obtaining 40 percent of its one?year financing in Canadian;dollars and 60 percent in Japanese yen. The forecasts of appreciation in;the Canadian dollar and Japanese yen for the next year are as follows;Probability;Possible;Percentage of that;Percentage;Change;in the Spot Change;in the;Currency Rate Over the Loan Life Spot Rate Occurring;Canadian dollar 4% 70%;Canadian dollar 7 30;Japanese yen 6 50;Japanese yen 9 50;The interest rate on the Canadian dollar;is 9 percent, and the interest rate on the Japanese yen is 7 percent. Develop;the possible effective financing rates of the overall portfolio and the;probability of each possibility based on the use of joint probabilities.;18. Investing;in a Portfolio.Pittsburgh Co. plans;to invest its excess cash in Mexican pesos for one year. The one?year;Mexican interest rate is 19%. The probability of the peso?s percentage;change in value during the next year is shown below;Possible Rate of Change;in the Mexican Peso Over Probability of;the Life of the Investment Occurrence;?15% 20%;?4% 50%;0% 30%;What is the expected value of the;effective yield based on this information? Given that the U.S.;interest rate for one year is 7%, what is the probability that a one?year;invest?ment in pesos will generate a lower effective yield than could be;generated if Pittsburgh Co. simply invested domestically?;Small Business;Dilemma;Cash Management at;the Sports Exports Company;1. If Jim invests the excess cash in U.S.;Treasury bills, would this reduce the firm?s exposure to exchange rate risk?;2. Jim;decided to use the excess cash to pay off the British loan. However, a friend advised him to invest the;cash in British Treasury bills, stating that ?the loan provides an offset to;the pound receivables, so you would be better off investing in British Treasury;bills than paying off the loan.? Is;Jim?s friend correct? What should Jim;do?


Paper#49387 | Written in 18-Jul-2015

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