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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 occurrence (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)

2,150,000

2,187,500

2,231,500

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 occurrence (i.e. 33.3%)

Strong Dollar: $0.8600

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)

$2,150,000

none of the above

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.

J and K have same level of exposure

Neither firm has any exposure

Last week ABC Land Lira-US dollar exchange rate moved from ABCL687,000/USD to ABCL1,072,000/USD. Calculate the depreciation of ABC Land lira visa vie US dollar. a-56.00% b- 65.00% c-35.91% d-none of the above

35.91%

none of the above

A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a

Suppose you work for XYZ Land-Citicorp in XYZ Land. A local bank wanted to buy USD50,000,000 three month forward. Since you think XYZ Land is a very risky environment you need to build 10% margin (annual) in your forward price to account for risk. Current spot and interest rates in USD and XYZ Land Lira are as follows. What would be your forward quote?

RXYZL: 35.00-45.00% p.a.

764.4

840.4

none of the above

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)

· 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/

Plains States could hedge the Euro receivables in the money market. Using the information provided how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate?

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

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.

USD/TRY1.7878

USD/TRY 2.1010

USD/TRY2.30

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/

· 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)

· 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/

loss, 95,000

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 _________.

P14.62

12.82

P13.69

None of the above

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?

Turkish Lira is undervalued

USD is overvalued

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?

8.32%

4.5%

3.72%

None of the above

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)

· 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 ________.

There is not enough information to answer this question.

There is not sufficient information to calculate the effective receipt!

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?

accounting exposure

translation exposure

transaction exposure

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/

· 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)

· 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 ________.

buy, $1.148

sell, 1.174

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 ________ is a bond underwritten by a syndicate from a single country, sold within that country, denominated in that country’s currency, but the issuer is from outside that country.

Suppose on that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum (bullet repayment of principal). During the year U.S. inflation is 2.00% and Mexican inflation is 12.00%. The loan was taken when the spot rate was Peso 3.40/US$. At the end of the one year loan period the exchange rate was Peso 5.80/US$.

Based on the above information, what is the cost to the firm of the loan in Mexican peso’s (percent)?

8.00 %

20%

84.24%

45.72

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)

· 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.