ECOM055 – Risk Management for Banking Final Exam 2021/22 Duration: 3 hours 银行风险管理代写 THIS IS AN OPEN BOOK EXAMINATION TO BE CONDUCTED ONLINE. YOU MAY REFER TO ANY OF THE COU...View details
LUBS5006M International Business Finance
Management of economic and transaction exposure (questions 1-10)
代写国际商业金融 1. DeMagistris Fashion Company DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and
1. DeMagistris Fashion Company
DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and long-time supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January 2002 it collapsed in value to Ps 4.0/$ by October 2002. The outlook was for a further decline in the peso’s value. Since both DeMagistris and Acuña wanted to continue their long-time relationship they agreed on a risksharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and
Ps4.5/$ DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range they will share the difference equally with Acuña Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be re-evaluated. DeMagistris contracts to import leather coats from Acuña for Ps8,000,000 or $2,000,000 at the current spot rate of Ps4.0/$ during the next six months.
a. If the exchange rate changes immediately to Ps6.00/$, what will be the dollar cost of 6 months of imports to DeMagistris?
b. At Ps6.00/$, what will be the peso export sales in Acuña Leather Goods to DeMagistris Fashion Company?
Illustrate that the result of the forward market hedge would be the same as the money market hedge if the Interest Rate Parity (IRP) holds.
3. Hurte-Paroxysm Products, Inc. (A)
Hurte-Paroxysm Products, Inc. (HP) of the United States exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais equivalent of $200 each. A strong rumour exists that the reais will be devalued to R$4.00/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HP Products faces a pricing decision which must be made before any actual devaluation: HP Products may either
(1) maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or
(2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 20% drop in volume. Direct costs in the U.S. are 60% of the U.S. sales price. What would be the short-run (one-year) implication of each pricing strategy? Which do you recommend?
4. Hurte-Paroxysm Products, Inc. (B) 代写国际商业金融
Assume the same facts as in Hurte-Paroxysm Products, Inc. (A). HP Products also believes that if it maintains the same price in Brazilian reais as a permanent policy, volume will increase at 10% per annum for six years. Dollar costs will not change. At the end of six years HP Products’ patent expires and it will no longer export to Brazil. After the reais is devalued to R$4.00/US$ no further devaluation is expected. If HP Products raises the price in reais so as to maintain its dollar price, volume will increase at only 4% per annum for six years, starting from the lower initial base of 40,000 units. Again dollar costs will not change, and at the end of six years HP Products will stop exporting to Brazil. HP Products’ cost of capital is 12%. Given these considerations, what do you recommend for HP Products’ pricing policy? Justify your recommendation.
A US firm holds an asset in France and faces the following scenario:
|State 1||State 2||State 3||State 4|
In the above table, P* is the € value of the asset held by the US firm and P is the $ value of the asset.
(a) Calculate the extent of the exchange risk exposure faced by the US firm.
(b) Calculate the variance of the $ value of the asset if the US firm remains unhedged against this exchange risk exposure.
(c) If the US firm hedges against this exchange risk exposure using a forward contract, calculate the variance of the $ value of the hedged position.
6. Siam Cement 代写国际商业金融
Siam Cement, the Bangkok-based cement manufacturer, suffered enormous losses with the coming of the Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the mid-1990s, taking on massive quantities of foreign currency denominated debt (primarily U.S. dollars). When the Thai baht (B) was devalued from its pegged rate of B25.0/$ in July 1997, Siam’s interest payments alone were over $900 million on its outstanding dollar debt (with an average interest rate of 8.40% on its U.S. dollar debt at that time). Assuming Siam Cement took out $50 million in debt in June 1997 at 8.40% interest, and had to repay it in one year when the spot exchange rate had stabilized at B42.0/$, what was the foreign exchange loss incurred on the transaction?
7. Vizor Pharmaceuticals
Vizor Pharmaceuticals, a U.S.-based multinational pharmaceutical company, is evaluating an export sale of its cholesterol-reduction drug with a prospective Indonesian distributor. The purchase would be for 1,650 million Indonesian rupiah (Rp), which at the current spot exchange rate of Rp9,450/$, translates into nearly $175,000. The Rp1,650 million will be paid by the Indonesian distributor in 90 days. Although not a big sale by company standards, company policy dictates that sales must be settled for at least a minimum gross margin, in this case, a cash settlement of $168,000.
The current 90-day forward rate is Rp9,950/$. Although this rate appeared unattractive, Vizor had to contact several major banks before even finding a forward quote on the rupiah. The consensus of currency forecasters at the moment, however, is that the rupiah will hold relatively steady, possibly falling to Rp9,400/$ over the coming 90 to 120 days. Analyse the prospective sale and make a hedging recommendation.
8. Pupule Travel 代写国际商业金融
Pupule Travel, a Honolulu, Hawaii – based 100% privately owned travel company has signed an agreement to acquire a 50% ownership share of Taichung Travel, a Taiwan – based privately owned travel agency specializing in servicing inbound customers from the United States and Canada. The acquisition price is 7 million Taiwan dollars (T$ 7,000,000) payable in cash in 3 months.
Thomas Carson, Pupule Travel’s owner, believes the Taiwan dollar will either remain stable or decline a little over the next 3 months. At the present spot rate of T$33.40/$, the amount of cash required is only $200,000 but even this relatively modest amount will need to be borrowed personally by Thomas Carson. Taiwanese interest-bearing deposits by non-residents are regulated by the government, and are currently set at 1.5% per year. He has a credit line with Bank of Hawaii for $200,000 with a current borrowing interest rate of 6.5% per year. He does not believe that he can calculate a credible weighted average cost of capital since he has no stock outstanding and his
competitors are all also privately-owned without disclosure of their financial results. Since the acquisition would use up all his available credit, he wonders if he should hedge this transaction exposure. He has quotes from Bank of Hawaii shown in the table below.
Analyse the costs and risks of each alternative, and then make a recommendation as to which alternative Thomas Carson should choose.
9. Burton Manufacturing 代写国际商业金融
Jason Stedman is the director of finance for Burton Manufacturing, a U.S.-based manufacturer of hand-held computer systems for inventory management. Burton’s system combines a low-cost active bar-code used on inventory (the bar-code tags emit an extremely low-grade radio frequency) with custom-designed hardware and software which tracks the low-grade emissions for inventory control. Burton has completed the sale of a bar-code system to a British firm, Pegg Metropolitan (UK), for a total payment of £1,000,000. The following exchange rates were available to Burton on the following dates corresponding to the events of this specific export sale. Assume each month is 30 days.
a. The foreign exchange gain/loss between the value booked and the value at which the contract is settled. (Note: the profit is recognized when the product is shipped to Pegg in June)
b. The foreign exchange gain/loss if a forward contract is purchased to hedge the contractual exposure.
10. Larking Hydraulics 代写国际商业金融
On May 1st, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12 megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000, payable €2,000,000 on August 1st and €2,000,000 on November 1st. Larkin derived its price quote of €4,000,000 on April 1st by dividing its normal U.S. dollar sales price of $4,320,000 by the then current spot rate of $1.0800/€.
By the time the order was received and booked on May 1st, the euro had strengthened to $1.1000/€, so the sale was in fact worth €4,000,000 x $1.1000/€ = $4,400,000. Larkin had already gained an extra $80,000 from favourable exchange rate movements. Nevertheless Larkin’s director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible:
Hedge in the forward market. The 3-month forward exchange quote was $1.1060/€ and the 6- month forward quote was $1.1130/€.
2. Hedge in the money market. Larkin could borrow euros from the Frankfurt branch of a U.S. bank at 8.00% per annum.
3. Hedge with foreign currency options. August put options were available at a strike price of $1.1000/€ for a premium of 2.0%, and November put options were available at $1.1000/€ for a premium of 1.2%. August call options at $1.1000/€ could be purchased for a premium of 3.0%, and November call options at $1.1000/€ were available at a 2.6% premium.
4. Do nothing. Larkin could wait until the sales proceeds were received in August and November, hope the recent strengthening of the euro would continue, and sell the euros received for dollars in the spot market.
Larkin estimates the cost of equity capital to be 12% per annum. As a small firm, Larkin Hydraulics is unable to raise funds with long-term debt. U.S. T-bills yield 3.6% per annum. What should Larkin do?