Homework 2 Questions - International Financial Management | FINA 4360, Assignments of International Finance and Trade

Download Homework 2 Questions - International Financial Management | FINA 4360 and more Assignments International Finance and Trade in PDF only on Docsity! International Finance Rauli Susmel FINA 4360 Homework 2 2.1 (Ch. 9) Forecasting with a Forward Rate. Assume that the four-year annualized interest rate in the United States is 9 percent and the four-year annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate of the Singapore dollar is USD .60. If the forward rate is used to forecast exchange rates, what will be the forecast for the Singapore dollar’s spot rate in four years? What percentage appreciation or depreciation does this forecast imply over the four-year period? 2.2 (Ch. 9) Probability Distribution of Forecasts. Assume that the following regression model was applied to historical quarterly data: ef,t = a0 + a1INTt + a2INFt-1 + εt where ef,t = percentage change in the USD/JPY exchange rate in period t INTt = interest rate differential between U.S. and Japan (iUS-iJAP) over period t INFt-1 = inflation differential between U.S. and Japan (IUS-IJAP) in the previous period a0, a1, a2 = regression coefficients εt = error term Assume that the regression coefficients were estimated as follows: a0 = 0.0, a1 = 0.9, a2 = 0.8 Also assume that the inflation differential in the most recent period was 3%. The real interest rate differential in the upcoming period is forecasted as follows: (iUS-iJAP) Probability 0% 30% 1 60% 2 10% If Stillwater, Inc., uses this information to forecast the Japanese yen’s exchange rate, what will be the probability distribution of the yen’s percentage change over the upcoming period? 2.3 (Ch. 10) Assessing Transaction Exposure. Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year: Currency Total Inflow Total Outflow St (USD/FC) Danish krone (DKK) DKK 50,000,000 DKK 40,000,000 USD .15 British pound (GBP) GBP 2,000,000 GBP 1,000,000 USD 1.50 Assume that the movements in the DKK and the GBP are highly correlated. Provide your assessment as to your firm’s degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer. 2.4 (Ch. 10) Transaction Exposure. Vegas Corp. is a U.S. firm that exports most of its products to Canada. It historically invoiced its products in CAD to accommodate the importers. However, it was adversely affected when the CAD weakened against the U.S. dollar. Since Vegas did not hedge, its CAD receivables were converted into a relatively small amount of USD. After a few more years of continual concern about possible exchange rate movements, Vegas called its customers and requested that they pay for future orders with USD instead of CAD. At this time, the Canadian dollar was valued at .81 USD/CAD. The customers decided to oblige, since the number of CAD to be converted into USD when importing the goods from Vegas was still slightly smaller than the number of CAD that would be needed to buy the product from a Canadian manufacturer. Based on this situation, has transaction exposure changed for Vegas Corp.? Has economic exposure changed? Explain. 2.5 (Ch. 10) Measuring Economic Exposure. Using the following cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and earnings items would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZD ): (1) .50 USD/NZD (2) .55 USD/NZD, and (3) .60 USD/NZD. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZD earnings will be remitted to the U.S. parent at the end of the period. Revenue and Cost Estimates: DeKalb Inc. (in millions of USD and NZD) U.S. Business NZ Business Sales USD 800 NZD 800 Cost of Goods Sold 500 100 Gross Profit USD 300 NZD 700 Operating Expenses 300 0 Earnings Before Interest and Taxes (EBIT) USD 0 NZD 700 Interest Expense 100 0 EBT –USD 100 NZD 700 2.6 (Ch. 10) Lagged Effects of Exchange Rate Movements. Cornhusker Co. is an exporter of products to Singapore. It wants to know how its stock price is affected by changes in the Singapore dollar’s exchange rate. It believes that the impact may occur with a lag of one to three quarters. How could regression analysis be used to assess the impact? 2.7 (Ch. 11) Forward versus Money Market Hedge on Receivables. Assume the following information: 180-day U.S. interest rate = 8% 180-day British interest rate = 9% Ft.180-day = 1.50 USD/GBP St = 1.48 USD/GBP Assume that Riverside Corp. from the United States will receive GBP 400,000 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. 2.8 (Ch. 11) Hedging With Put Options. As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of NZD 250,000 (NZD=New Zealand dollar) 90 days from now. Put options are available for a premium of USD .03 per unit and an exercise price of .49 USD/NZD. The forecasted (USD/NZD) spot rate in 90 days follows: