12 Problems with Solutions on Financial Management - Assignment 2 | FINA 4360, Assignments of International Finance and Trade

Download 12 Problems with Solutions on Financial Management - Assignment 2 | FINA 4360 and more Assignments International Finance and Trade in PDF only on Docsity! FINA 4360 Homework 2: Solutions 2.1 (Chapter 9) Country 4-year compounded return U.S. (1.09)4 – 1 = 41% Singapore (1.06)4 – 1 = 26% => p = (1.41/1.26) - 1 = .119 (11.9%) The 4-year forward rate should contain an 11.9% premium above today's spot rate of .60, which means the forward rate (Ft,4-yr) is .60 USD/SGD x (1 + .119) = .6714 USD/SGD. The 4-year forecast is .6714 USD/SGD (SGD is expected to appreciate against USD by 11.9%). 2.2 (Chapter 9) Interest Rate Differential Forecast of the % Change in JPY (E[ef,t]) Probability 0% .9(0%) + .8(3%) = 2.4% 30% 1% .9(1 %) + .8(3%) = 3.3% 60% 2% .9(2%) + .8(3%) = 4.2% 10% E[ef,t] = 3.12% 2.3 (Chapter 10) The net exposure to each currency in U.S. dollars: Currencv Net Inflows in Foreign Currency St TE DKK DKK 1 0,000,000 0.15 USD/DKK USD 1.5 M GBP GBP 1,000,000 1.50 USD/GBP USD 1.5 M The DKK and the GBP are highly correlated. Both the DKK and the GBP exposure show positive net inflows. The exposure is not “hedged” => high exposure. 2.4 (Chapter 10) The bottom line is that transaction exposure is reduced since Vegas will have less receivables in Canadian dollars (CAD). It should be noted that economic exposure will not necessarily be reduced because a weak CAD could cause a lower demand for its exports. 2.5 (Chapter 10) (Figures are in USD millions) .50 USD/NZD .55 USD/NZD .60 USD/NZD Sales U.S. 800 800 800 New Zealand 400 440 480 Total 1,200 1,240 1,280 Cost of Goods Sold U.S. 500 500 500 New Zealand 50 55 60 Total 550 555 560 Gross Profit 650 685 720 Operating expenses 300 300 300 EBIT 350 385 420 Interest expenses 100 100 100 Earnings after taxes 250 285 320 The table shows that DeKalb Inc. is adversely affected by a weaker NZD value. 2.6 (Chapter 10) A possible regression model for this task is to regress percentage change in its stock price over quarter t (stockrett) against the percentage change in the USD/SGD exchange rate (ef) in the three previous quarters, shown as follows. stockrett =  + 1 ef,t–1 + 2 ef,t–2 + 3 ef,t–3 + ut where ut is the error term. The sum of the ßs (1+2+3) measures the sensitivity of stock prices (through stock returns) to changes in the USD/SGD exchange rate (through ef,t). 2.7 (Chapter 11) Possible St+T Prob. Put Premium Exercise (X=.49 USD/NZD) Amount per unit Received Total Amount Received for NZD 250,000 .44 USD/NZD 30% USD .03 Yes USD .46 USD 115,000 .40 USD/NZD 50% USD .03 Yes USD .46 USD 115,000 .38 USD/NZD 20% USD .03 Yes USD .46 USD 115,000 The probability distribution represents a 100% probability of receiving USD 115,000, based on the forecasts of the future USD/NZD exchange rate. The put option has established a floor of USD 115,000. Note: No information on interest rates, cannot estimate opportunity cost! 2.8 (Chapter 11) 1) Forward hedge (sell GBP forward). Firm will receive GBP 400,000 x (1.50 USD/GBP) = USD 600,000 in 180 days. 2) Money market hedge (borrow GBP at 9%, convert to USD, invest in U.S. at 8%) Firm will borrow GBP 400,000/(1+.09x180/360) = GBP 382,775 Firm will convert to USD GBP 382,780 x 1.48 USD/GBP = USD 566,507 (amount to deposit) Firm will receive USD 566,507*(1+.08*180/360) = USD 589,167 Comparison: Firm will receive USD 600,000 in 180 days using FH, or about 589,167 in 180 days using MMT. Firm should use the forward hedge because it delivers the highest payout. 2.9 (Chapter 11) Put option hedge (Exercise price = .52 USD/NZD; premium = USD .03) Amount per Total Amount Possible Spot Put Option Exercise Unit Received Received For Rate Premium Option? Including premium NZD 4.000.000 Probability .50 .03 Yes .49 1,949,200 20% .51 .03 Yes .49 1,949,200 50% .53 .03 No .50 1,989,200 30% Opportunity cost = NZD 4000000 x .03 USD/NZD x .09 = USD 10,800 Expected Amount to be received = USD 1,961,200.