Chapter 11 Questions 国际金融

1、Chapter11Transaction Exposure ProblemsQuestion 8 and 9 Creating Transaction Exposure. Identify and create a hypothetical example for each of the four causes of transaction exposure.CausesExamplesPurchasing or selling on credit goods or services when prices are stated in foreign currenciesTridentBorr

2、owing or lending funds when repayment is to be made in a foreign currencyGemexBeing a party to an unperformed foreign exchange forward conactOtherwise acquiring assets or incurring liabilities denominated in foreign currenciesthree types of transactionsPurchasing or Selling on Open Account Suppose t

3、hat Trident Corporation sells merchandise on open account to a Belgian buyer for 1,800,00, payment to be in 60 days. The current exchange rate is $1.2000/, Trident expects to receive: 1,800,00 $1.2000/ = $2,160,000 If the euro weakens to $1.1000/, then the company will receive: 1,800,00 $1.1000/ = $

4、1,980,000 If the euro strengthens to $1.3000/, the company will receive: 1,800,00 $1.3000/ = $2,340,000Borrowing and Lending In mid-December 1994, Gemex had U.S. dollar debt of $264 million. At that time, Mexicos new peso was traded at Ps3.45/US$, a pegged rate that had been maintained with minor va

5、riations since January 1, 1993, when the new currency unit was created. On Decmber 22, 1994, the new peso was allowed to float because of ecnomic and polistical events within Mexico, and in one day it sank to Ps4.65/US$. For most of the following January it traded in a range near Ps5.50/US$. The inc

6、rease in the peso amount of its dollar debt: in mid-December 1994: US$264 million Ps2.45/$ = Ps910,800,000 in mid-January 1995: US$264 million Ps5.50/$ = Ps1,452,000,000 increased measured in new Mexican pesos: Ps1,452,000,000 - Ps910,800,000 = Ps541,200,000Three types of transaction exposures quota

7、tions exposures backlog exposures billing exposures 9. Cash Balances. Why does the holding of foreign currency cash balances not lead to transaction exposure? Because no legal obligation exists to move the cash from one country and currency to another. If such an obligation did exist, it would show

8、on the books as a payable (for example, dividends declared and payable) or receivable and then be counted as part of transaction exposure.Question11.10Explain the difference between a natural hedge and a contractual hedge. Give a hypothetical example of each. A natural hedge is one that results from

9、 matching foreign currency cash flows that come about from the normal operations of a MNE. A contractual hedge is a contract specifically entered into as a financial rather than operating hedge. Mattel Toys.Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Am

10、ericas) and one-third in euros (Europe). In September , Mattel delivers a large shipment of toys (primarily Barbies and Hot Wheels) to a major distributor in Antwerp. The receivable, 30 million, is due in 90 days, standard terms for the toy industry in Europe. Mattels treasury team has collected the

11、 following currency and market quotes. The companys foreign exchange advisors believe the euro will be at about $1.4200/ in 90 days. Mattels management does not use currency options in currency risk management activities. Advise Mattel on which hedging alternative is probably preferable. Read the pr

12、oblem carefully List the ways to hedge Compare all the result Forward Market Hedge With Credit Suisse: 30m $1.4172/ = $ 42.5160m With Barclays: 30m $1.4195/ = $ 42.5850m$40.5286mConvert to USD at Spot rateCost of capital at 9.6%$41.5012mRepay 30mBorrow 28.5714mBorrow in UK at 5%Lend as Eurodollar at

13、 4%$42.1497m Read the problem carefully List the ways to hedge Compare all the result Forward market hedge$42.5850MMoney market hedge$42.1497MSo, Mattel may prefer the method two Problem11.10 Farah Jeans Construction payment due in six months Q8,400,000Present spot rate Q7.0000/$Six-month forward ra

14、te Q7.1000/$Guatemalan six-month interest rate 14.00% per annumU.S. dollar six-month interest rate 6.00% per annumFarahs weighted average cost of capital 20.00% per annum Remain Unhedged The managers own forecast is as follows:Highest expected rate: Q8.0000/$Expected rate: Q7.3000/$Lowest expected r

15、ate: Q6.4000/$Highest expected rate: Q8,400,000/(Q8.0000/$ ) =$1,050,000 Expected rate: Q8,400,000/(Q7.3000/$) =$1,150,685Lowest expected rate: Q8,400,000/(Q6.4000/$ ) =$1,312,500 Cost CertaintyHighest expected rate: $1,050,000 UncertainExpected rate: $1,150,685 UncertainLowest expected rate: $1,312

16、,500 UncertainUse Forward Market Hedge Farah could buy Q8,400,000 forward, locking in a rate of Q7.10000/$Q8,400,000/(Q7.10000/$)=$1,183,099Cost $1,183,099 this is certainUse Money Market Hedge Farah would exchange U.S. dollars spot and invest them for 180 days in a quetzal-denominated interest-bear

17、ing account. It would then use the principal and interest in quetzals at the end of the 180-day period to pay the 8,400,000 account payable.Q8,400,000/(1+14%*180/360) = Q7,850,467Q7,850,467/(Q7.0000/$) =$1,121,495$1,121,495*(1+0.20*180/360) = $1,233, 645Cost $1,233,645 this is certainResult Cost Cer

18、tainty1、Remain UnhedgedHighest expected rate: $1,050,000 UncertainExpected rate: $1,150,685 UncertainLowest expected rate: $1,312,500 Uncertain2、Use Forward Market Hedge $1,183,099 Certain3、Use Money Market Hedge $1,233,645 CertainAvailable choice is Use Forward Market Hedge Problem 11.12 Chronos Ti

19、me PiecesChonos Time Pieces of Boston exports watches to many countries,selling in local currencies to stores and distributes. Chonos prides itself on being financially conservative. At least 70% of each individualtransaction exposure is hedged, mostly in the forward market, but occasionally with op

20、tion.Chronoss foreign exchange policy is such that 70% hedge may be increased up to a 120% hedge if devaluation or depreciation appears imminent. Chonos has just shipped to its major North American distributor. It has issued a 90-day invoice to its buyer for 1,560,000. The current apot rate is $1.22

21、24/, the 90-day forward rate is $1.2270/. Chonoss treasurer, Manny Hernandez, has a very good track record in predicting exchange rate movements. Currently he believes the euro will weaken against the dollar in the coming 90 to 120 days, possibly to around $1.16/.a. Evaluate the hedging alternatives

22、 for Chronos if Manny is right (Case#1:$1.16/) and if Manny is wrong (Case#2:$1.26/). What do you recommend?1.hedgeing alternative with 70% hedgeWith 70%, Chronos just use 70% of 1,560,000 (1,560,000*70%= 1,092,000) to deliver them at the agreed forward rate ($1.2270/)after 90 days.The other 30% wil

23、l be exchange to dollar at that days rate after 90 days.2.hedgeing alternative with 120% hedgeSo what is 120% hedge? In my opinion, with 120%, Chronos use 120% of 1,560,000 ( 1,560,000*120%=1,872,000)to deliver them at the agreed forward rate.The extra 20% of 1,560,000 (1,560,000*20%= 312,000) can b

24、e gotten through exchange at spot rate($1.2224/), costing (312,000/$1.2224/=$255,236). Or maybe Chronos get 312,000 from other transaction？Three months later, Chronos delivers 1,872,000 at the agreed rate ($1.2270/).So if Manny is right (Case#1:$1.16/),With 70%:1,560,000*70%*$1.2270/+1,560,000*30%*$

25、1.16/=$1,882,764With 120%:1,560,000*120%*$1.2270/-1,560,000*20%/$1.2224/=$2,041,708if Manny is wrong (Case#2:$1.26/),With 70%:1,560,000*70%*$1.2270/+1,560,000*30%*$1.26/=$1,929,564With 120%:1,560,000*120%*$1.2270/-1,560,000*20%/$1.2224/=$2,041,708So the hedging alternative with 120% is better, I suggest Chronos do a 120% hedeg that can get more money.b. What does it mean to hedge 120% of a transaction exposure?It means that the company uses extra own dollars to hedge, not from the receivable . Actually, anyone can do this. But it is risky, if the receivable can be covered