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The document discusses various currency hedging scenarios and requests calculations to determine the optimal hedging strategy. It provides current exchange rates, interest rates, and future forecasts. The assistant is asked to analyze the scenarios and recommend the best hedging approach or explain why leaving exposure unhedged may be preferable.
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![103. You are planning to hedge a payables exposure in dollars and have collected the following information.<br />Spot : (Rs./$)42.50/42.60<br />3-month forward (Rs./$)43.50/43.70<br />Interest rate: $ - 6%<br />Rs. – 15%<br />If the exposure will mature in 3 months and there are no restrictions on trading in forward/money market instruments, what cover would you prefer – forward cover or money market cover? Show necessary calculations.<br />104. You were to import an equipment for your project and you have a choice to invoice in the following currencies:<br />Invoice Value£ 1,00,000S$ 2,90,000NKr 9,17,000Spot rate67.50/9023.25/407.05/151-m Forward rate25/4010/1520/252-m Forward rate50/90---------1-m Interest rate6.004.004.502-m Interest rate6.254.254.75<br />You have the option to pay at the end of 1st month or 2nd month along with interest at the applicable rates. However, the pay-out at the end of 2nd month has to be made in Euro and actual pay-out depends on how the rates are fixed with Euro. If the Rs./Euro is 47, after 2 months, compute the limits for S$/Euro and NKr/Euro rates that will make invoicing in S$ and NKr a better choice than £. Which currency do you select if you prefer to pay at the end of first month?<br />105. M/s. Windfall Ltd. has to import raw material in three consignments at the rate of one consignment every month in the next three months. Payments will have to be made at the end of each month. The company has the option to invoice the consignment either in US $ or Euro. The terms as under:<br />US $EuroTo be paid afterFirst Consignment1,50,0001,57,0001 monthSecond Consignment3,00,0003,12,0002 monthsThird Consignment2,50,0002,62,0003 months<br />You, as the Finance Manager of the company, have the following forecast for the exchange rates:<br />After 1 monthAfter 2 monthsAfter 3 monthsUS $/Euro1.0455/561.0418/091.0400/01Rs./US$43.25/3543.45/5843.75/85<br />The current forward quotes in the market are as under:<br />After 1 monthAfter 2 monthsAfter 3 monthsUS $/Euro1.0465/671.0426/291.0415/19Rs./US$43.45/5043.65/7543.80/95<br />Suggest the currency in which you invoice for each of the consignment.<br />,[object Object]](https://image.slidesharecdn.com/if2-12726114288529-phpapp01/85/If-2-1-320.jpg)
![If the exposure is left uncovered.106. International Industries Ltd. (IIL), an Indian company, has a receivable of $ 1,000,000 maturing three months from now and a payable of £ 1,500,000 maturing in six months. The company has decided to hedge the two separately. The following information is available regarding the same:<br />Exchange Rates<br />Rs./$Spot43.65/70<br />3-m forward44.75/85<br />6-m forward44.80/95<br />Rs./£Spot70.25/50<br />3-m forward70.50/00<br />6-m forward71.15/80<br />Interest Rates (%)<br />Rs.$£3-months9.00/9.504.00/4.255.00/5.256-months10.00/11.004.50/5.006.00/6.50<br />Advise the company on whether it should adopt a forward cover or a money market cover.<br />107. A to Z Pharma Inc., a US based company, has a receivable of C$ 1,000,000 maturing five months from now. The company is considering whether the exposure should be hedged through futures or a money market cover. Six-month futures on Canadian dollars are now trading at US$ 0.7205 and the current $/C$ rate is 0.7005. The interest rate for five-month investment in US$ is 6% p.a.<br />,[object Object]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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c. Given the transactions of the production and retirement units as given
previously, what do you conclude are the exchange-rate risks faced by
RMS as a whole in Europe? Does RMS need to enter into forward
contracts? (3 marks)
2. (10 marks) Suppose the spot exchange rate between U.S. dollar and
Canadian dollar is US$1.03/C$. The U.S. dollar risk-free rate is 2% per
annum, compounded annually. The price of a two-year European call option
and put option with an exercise price of US$1.05/C$ is US$4.45 and
US$4.54, respectively. What is the Canadian dollar risk-free rate?
FNCE 403v2 Assignment 3 Revised Nov. 7, 2012
3. (10 marks) Two firms have the borrowing rates shown below.
Firm Fixed Rate Floating Rate
AAA 5 yr T-bond + 60 bp LIBOR
BBB 5 yr T-bond + 75 bp LIBOR + 30 bp
As the CFO of firm AAA, you always consider an interest rate swap before
borrowing money. Explain how, if at all, a swap with BBB would be
advantageous to you if
a. you wanted to borrow at a fixed rate. (7 marks)
b. you wanted to borrow at a floating rate. (3 marks)
4. (10 marks) A corporation enters into a $35 million notional principal plain
vanilla interest rate swap. The swap calls for the corporation to pay a fixed
rate and receive a floating rate of LIBOR. The payments will be made every
three months for one year. The term structure of LIBOR when the swap is
initiated is as follows:
Months Rate (%)
3 7.00
6 7.25
9 7.45
12 7.55
Assume all of rates are continuously compounded.
a. Determine the fixed rate on the s ...
Transaction exposure 1
- The document discusses transaction exposure (TE), which is the risk from changes in exchange rates for contracts that have been agreed to but not yet settled.
- It describes various ways to manage TE, including through forward contracts, money market hedges, options, and swaps. It also discusses operational techniques like invoice currency choice and exposure netting.
- Examples are provided to illustrate comparing forward contracts to money market hedges for an exporter receiving foreign currency and an importer paying foreign currency. The more advantageous hedge depends on interest rate differences.
Management of transaction exposure q and a
Hedging transaction exposure using forward contracts versus money market instruments can produce the same results under certain conditions. Forward contracts allow selling or buying foreign currency receivables or payables at a set future rate. Money market hedges involve borrowing or lending the present value of foreign currency amounts to create offsetting positions. If interest rate parity holds, the two methods are equivalent. Options contracts provide advantages over forward contracts by allowing the hedger to decide whether to exercise based on the realized exchange rate, eliminating downside risk while retaining upside potential.
Fin 534 financial management – fin534 homework
FIN 534 Financial Management – FIN534 Homework
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International Finance Practice Numerical
This document contains 13 questions regarding foreign exchange rates, calculations of spot rates, forward rates, cross rates, and arbitrage opportunities. It includes calculating bid/ask spreads, mid rates, direct/indirect quotes, percentage spreads, and using multiple exchange rates to analyze arbitrage scenarios.
Acc 306 Teaching Effectively--tutorialrank.com
For more course tutorials visit
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BE 13-1
BE 13-4
E 13-2
E 13-10
BE 13-7
P 13-8
BE14-8
Chapter8 International Finance Management
This document provides sample answers and solutions to end-of-chapter questions and problems from a chapter about managing transaction exposure. It defines transaction exposure and differentiates it from economic exposure. It discusses and compares hedging transaction exposure using forward contracts versus money market instruments. It also compares the costs of hedging with forward contracts versus options contracts. Additional questions and problems cover topics like currency options, cross-hedging, and the effects of hedging on tax obligations.
1 FINAECON 340 Bank Portfolio Simulation Guide and .docx
1
FINA/ECON 340
Bank Portfolio Simulation Guide and Worksheets
Version 1.3
This document is intended as a guide for the completion of the five rounds of the simulation. Here explanations
of calculations and samples of inputs are provided in red font with the description of the assignments from the
course modules in black. Use this as a guide to completing the tables in the templates your instructor provides to
you.
Assignment 2-2 (6-Week Class) or 3-2 (12-Week Class): Initial Bank Portfolio
Overview
In this course you will be asked to make decisions involving the management of a bank in a multi-phase market
simulation. The market simulation will consist of five rounds. At the beginning of each round, you will be given
the probability of possible states of the world that will subsequently occur during that round. You will then
make your allocation decisions based on the returns possible in these probable states. At the end of each phase,
you revalue your balance sheet, calculate your institution’s profitability for the period, and make new
allocations for the next round. Please note that the recalculated financial position of your institution at the end
of each round will become the starting financial position for the next round. The goal of the simulations is to
maximize the return to your shareholders in each phase. Your grade in each phase will be determined by your
performance in the simulation, the rationale you provide for the allocation decisions you make, and short
answer responses to questions related to the coursework.
In Round 1 you are asked to allocate initial equity capital among alternative liquid investments: cash, one-year
Treasury bills, 5-year Treasury notes, and 15-year Treasury bonds. Your goal is to maximize return and
minimize risk in this start-up phase until you are able to generate riskier assets, such as loans, and leverage your
initial equity with debt.
In Round 2 of the simulation you begin to diversify the composition of your assets, choosing among types of
loans with varying levels of risk and return. You can also grow your assets further by adding debt with
alternative sources of liabilities, including deposits and borrowed funds. Note that different assets and liabilities
have different returns and default rates based on the state of the world that occurs.
In Round 3 new capital requirements are imposed by regulators that may force you to made adjustments in the
risk carried on your balance sheet, including possibly taking some risk off balance sheet.
In Round 4 of the simulation you can expand your operations internationally with new asset and funding
alternatives.
In Round 5, the final round, you conduct a financial analysis of your bank and assess its performance.
Action Items for Round One
1. Assume that you have been granted a charter to open a bank with an initial capitalization of $1,000,000.
Before you begin to build a loan p ...
FNCE 403 v4 Final Term Assignment Due Date The Final Term Assi.docx
FNCE 403 v4: Final Term Assignment
Due Date: The Final Term Assignment should be submitted before you apply for your final
Credit Weight: This assignment is worth 45 percent of your final grade.
Question 1. Margin Account and Settlement (6 marks)
Suppose that you bought two one-year gold futures contracts when the one-year futures price of gold was US$1,340.30 per troy ounce. You then closed the position at the end of the sixth trading day. The initial margin requirement is US$5,940 per contract, and the maintenance margin requirement is US$5,400 per contract. One contract is for 100 troy ounces of gold. The daily prices on the intervening trading days are shown in the following table.
Day
Settlement Price
0
1340.30
1
1345.50
2
1339.20
3
1330.60
4
1327.70
5
1337.70
6
1340.60
Assume that you deposit the initial margin and do not withdraw the excess on any given day. Whenever a margin call occurs on Day t, you would make a deposit to bring the balance up to meet the initial margin requirement at the start of trading on Day t+1, i.e., the next day.
a. What are the initial margin and maintenance margin on your margin account?
(1 mark)
b. Fill the appropriate numbers in the blank cells in the following table. (Hint: See solution to Q19 in Lesson 2 Learning Activity. (4marks)
Day
Settlement price per troy ounce
Mark-to-Market
Other Entries
Account Balance
Explanation
Margin Call? Y/N
0
$1340.30
1
$1345.50
2
$1339.20
3
$1330.60
4
$1327.70
5
$1337.70
6
$1340.60
c. What is your total profit after you closed out your position? (1 mark)
Question 2. Binomial Model and Option Pricing (14 marks)
The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected to go up by 10 percent or down by 5 percent in each of the following two months (Month 1 and Month 2). XYZ Inc. is also expected to pay a dividend yield of 2 percent at the end of Month 1. The risk-free rate is 0.5 percent per month.
a. What is the value of an American call option on XYZ shares, with an exercise price of $125 and two months to expiration? Use the binomial model to obtain the answer.
(12 marks)
b. Draw a binomial tree diagram for this American call option, showing the share price, call price, and whether the call should be exercised at each state during the next two months. (2 marks)
Question 3. Currency Option Pricing with Binomial Model (10 marks)
On January 11, the spot exchange rate for the U.S. dollar is $0.70 per Canadian dollar. In one year’s time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15 percent. We have a European put option on U.S. dollars expiring in one year, with an exercise price of 1.39 CND$/US$, that is currently selling for a price of $2.93. Each put option gives the holder the right to sell 10,000 U.S. dollars. The current one-year Canadian Treasury Bill rate is 2 percent, while the one-year U.S. Treasury Bill rate is 3 percent, both compounded ann ...
Ch10
The document discusses accounting for current and long-term liabilities. It defines a current liability and identifies major types like accounts payable, unearned revenue, and payroll taxes payable. It describes accounting for notes payable, bonds, and bond issuance at face value, discount or premium. It also addresses accounting entries for bond interest expense and redemption, and financial statement presentation of liabilities.
If 1
An Indian company completes a $1 million CAD project and is owed payment by 1/1/04 but can only enter 6 month forward contracts. It uses rolling 6 month contracts and the exchange rates fluctuate over time. Calculating the cash flows shows rolling contracts results in better returns than leaving the exposure uncovered.
8. futures and forwards
Futures and forwards are contracts that require deferred delivery of an underlying asset or cash settlement at a future date. A future is traded on an exchange and has standardized terms, while a forward is a customized over-the-counter contract. Forwards are useful when futures do not exist for a commodity or financial or when standard futures terms differ from needs. Euro-rate differentials futures contracts are tied to interest rate differentials between currencies and used to hedge currency exposures. Foreign exchange agreements allow hedging of exchange rate movements through a single cash settlement without a currency swap.
HW 5.docxAssignment 5 – Currency riskYou may do this assig.docx
HW 5.docx
Assignment 5 – Currency risk
You may do this assignment alone or with one other person. For each of your answers, be as specific as possible about all transactions and amounts involved.
All interest rates are stated as annual rates.
Part 1 Transaction risk
1 (10 points)
a. Select a foreign currency
b. Find the spot exchange rate for that currency
c. Select an amount between 150 million and 200 million
d. Select a number of months between 3 and 9
e. Select either payable or receivable. If you select payable, for the rest of the questions in this part of the assignment, assume a US firm is required to make a payment of the number selected in part c of the foreign currency from part a at the time selected in part d. If you select receivable, assume a US firm expects to receive a payment of the number of units selected in part c of the foreign currency from part a at the time selected in part d.
e. Describe the future payment (in $) from the above assumptions if the exchange rate remains the same as it is today.
2. (10 points) Explain how the firm can use leading or lagging to reduce the exchange rate risk created by this payment.
3. (20 points) Assume the US interest rate is 2% and the foreign interest rate is 5%, how can the firm hedge the transaction risk associated with the payment using a money market hedge?
4 (20 points)
a. How can the firm hedge the transaction risk associated with the payment using a forward market hedge?
b. If the forward price is 1% lower than the spot exchange rate (from 1b) and the actual exchange rate on the date the payment is due is 1% higher than the spot exchange rate, what will the dollar value of the amount the firm pays or receives on the due date be?
c. If the forward price is 2% higher than the spot exchange rate (from 1b) and the actual exchange rate on the date the payment is due is 1% higher than the spot exchange rate, what will the dollar value of the amount the firm pays or receives on the due date be?
5 (20 points)
a. How can the firm hedge the risk associated with the payment using a foreign currency option?
b. If the option’s strike price is equal to the spot exchange rate (from 1b) and the actual exchange rate on the payment is due is 2% lower than the spot market price, will the firm exercise the options and what will the dollar amount the firm pays or receives on the due date be?
c. If the option’s strike price is equal to the spot exchange rate (from 1b) and the actual exchange rate on the payment is due is 2% higher than the spot market price, will the firm exercise the options and what will the dollar amount the firm pays or receives on the due date be?
6. (10 points) How could the firm hedge the transaction risk associated with this payment by exposure netting or funds adjustment?
Part 2 Economic risk
1. (10 points) Obtain weekly stock prices for the last five years for a US company and a foreign company of your choice.
2. (10 points) Obtain exchange rates for three dif ...
interest rate parity
This document discusses interest rate parity theory. It begins by defining spot and forward rates. Spot rates are prices for immediate settlement, while forward rates refer to rates for future currency delivery adjusted for cost of carry. Interest rate parity theory states that interest rate differentials between currencies will be reflected in forward premiums or discounts. The theory prevents arbitrage opportunities by making returns equal whether investing domestically or abroad when measured in the home currency. The document provides an example of covered and uncovered interest rate parity. Covered parity involves hedging exchange rate risk while uncovered parity does not. Empirical evidence shows uncovered parity often fails while covered parity generally holds for major currencies over short time horizons.
Long Term Liabilities
The document discusses accounting for long-term liabilities such as bonds payable and notes payable. It covers topics such as issuing long-term debt, types of bonds, valuation of bonds at issuance, accounting for bond discounts and premiums including amortization methods, extinguishment of debt, accounting for notes payable including zero-interest notes, and off-balance sheet financing arrangements. Examples and illustrations are provided for various bond and note transactions to demonstrate the accounting entries.
Instructions1. For the questions requiring a written explanatio.docx
Instructions:
1. For the questions requiring a written explanation, please be as brief as possible. None of the questions require a lengthy answer. Often, one sentence per point to explain is enough.
2. Show all your work for maximum credit.
3. PUT YOUR ANSWERS IN RED WITH THE EXAM QUESTION BUT ENSURE THE GRADER CAN IDENTIFY YOUR QUICKLY IDENTIFY. BUT PLEASE MAKE SURE YOU IDENTIFY EACH ANSWER SO THAT I KNOW THE QUESTION YOU ARE ANSWERING.
PART I(50 points) Journal Entries
Whammy Company begins the month of May with $2,000 in cash and $2,000 in stock sold at par. During the month, the company has eight transactions. Prepare the appropriate journal entries for each transaction. You will also need to prepare the appropriate adjusting journal entries.
1. On May 1, the company receives $3,000 cash. The company has agreed to allow a potential customer to use rent part of the company’s office space from May 1 through July.
2. On May 1 the company buys a one year $100,000 fire insurance policy for the office building. The one year premium paid on May 1 was $2,400.
3. The company purchases inventory for $6,000. $5,000 was purchased on credit and the remainder with cash.
4. The company sells the entire inventory for $19,000 on account.
5. The company collects $3,000 of the accounts receivable.
6. The company pays $2,000 on the account payable.
7. Employees earn $6,000, to be paid next month.
8. During May the company purchases $1,200 of office supplies with cash. On May 31, there are only $700 of office supplies left.
PART IIBOND PRICING (40 Points)
1. (10 Points) The University of Alabama sells three year bonds with a $800,000 face value to private investors. The bonds are due in three years, have a 6% coupon rate, and interest is paid annually. The bonds were sold to yield 8%. What proceeds does UA receive from the investors?
2. (5 Points) Did the bond sell for par, a premium or a discount? How much was the premium or discount?
3. (5 Points) If the bond sold for a premium or discount, what is the balance in the premium or discount following the interest payment at the end of year 1?
4. (26 points) Prepare all of the necessary journal entries, beginning with the issuance of the bond, the three annual interest payments and the bond retirement at the end of year 3.
Part III Statement of Cash Flows (32 Points)
Prepare a Statement of Cash Flow for the year ending 2017 from the following information.
2016
2017
Cash
85,000
27,000
Accounts Receivable
95,000
80,000
inventory
130,000
134,000
prepaid expenses
9,500
9,000
land
89,700
130,000
PP&E
295,500
256,700
accumulated depr
-30,000
-13,000
total assets
674,700
623,700
accounts payable
98,000
77,000
accrued liabilities
54,000
70,000
bonds payable
110,000
60,000
common stock
100,000
101,000
retained earnings
312,700
315,700
674,700
623,700
PP&E with a historical cost of $50,000 and a net book value of $28,000 was sold for $22,500
Dividends.
MF0015 - INTERNATIONAL FINANCIAL MANAGEMENT
This document provides information about getting fully solved assignments. It instructs students to send their semester and specialization name to an email address or call a phone number to receive assistance with assignments. It then provides an example of an assignment question related to international financial management that covers topics like forward markets, interest rate parity, cash concentration strategies, and international taxation. The assignment asks students to answer 6 questions in approximately 400 words each and provides an evaluation scheme for each question.
CHAPTER_3_TIME_VALUE_OF_MONEY.ppt
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CHAPTER_3_TIME_VALUE_OF_MONEY.ppt
Management of funds is a critical aspect of financial management. Management of funds acts as the foremost concern whether it is in a business undertaking or in an educational institution. Financial management, which is simply meant dealing with management of money matters.
Financial Management is efficient use of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm. Here it deals with the situations that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise. Herein the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. In short, Financial Management deals with Procurement of funds and their effective utilization in the business.Management of funds is a critical aspect of financial management. Management of funds acts as the foremost concern whether it is in a business undertaking or in an educational institution. Financial management, which is simply meant dealing with management of money matters.
Financial Management is efficient use of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm. Here it deals with the situations that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise. Herein the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. In short, Financial Management deals with Procurement of funds and their effective utilization in the business.
Management of funds is a critical aspect of financial management. Management of funds acts as the foremost concern whether it is in a business undertaking or in an educational institution. Financial management, which is simply meant dealing with management of money matters.
Financial Management is efficient use of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm. Here it deals with the situations that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise. Herein the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. In short, Financial Management deals with Procurement of funds and their effective utilization in the business.
Management of funds is a critical aspect of financial management. Management of funds acts as the foremost concern whether it is in a business undertaking or in an educational institution. Financial management, Management of fund
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FNCE 403v2 Assignment 3 Revised Nov. 7, 2012 Assignmen.docx
FNCE 403v2 Assignment 3 Revised Nov. 7, 2012 Assignmen.docx
1 FINAECON 340 Bank Portfolio Simulation Guide and .docx
1 FINAECON 340 Bank Portfolio Simulation Guide and .docx
FNCE 403 v4 Final Term Assignment Due Date The Final Term Assi.docx
FNCE 403 v4 Final Term Assignment Due Date The Final Term Assi.docx
HW 5.docxAssignment 5 – Currency riskYou may do this assig.docx
HW 5.docxAssignment 5 – Currency riskYou may do this assig.docx
Instructions1. For the questions requiring a written explanatio.docx
Instructions1. For the questions requiring a written explanatio.docx
If 2
- 4. Find at what expected spot rate will Amico be indifferent between
- 5. Open position and forward hedge
- 6. Open position and hedge through call option
- 11. Explain why it is/it is not better to have the exposure unhedged.