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    FIN 534 Homework Ch.17

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    pokadotloknot
    1. The document provides information about a homework assignment involving foreign exchange rates and currency risk. It includes 5 questions about interest rate parity, forward exchange rates, hedging currency risk, purchasing power parity, and calculating the net present value of a foreign investment project. 2. Question 3 asks about hedging currency risk on a foreign purchase by a US importer, and calculates that hedging saved the importer $638 based on the spot and forward exchange rates and purchase amount. 3. Question 5 provides information to calculate the net present value of a potential $10 million foreign investment by a US company, accounting for political risk, cash flows blocked by the foreign government, and the company's higher cost of capital

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    FIN 534 Homework Ch.17

    Uploaded by

    pokadotloknot
    375 views2 pages
    1. The document provides information about a homework assignment involving foreign exchange rates and currency risk. It includes 5 questions about interest rate parity, forward exchange rates, hedging currency risk, purchasing power parity, and calculating the net present value of a foreign investment project. 2. Question 3 asks about hedging currency risk on a foreign purchase by a US importer, and calculates that hedging saved the importer $638 based on the spot and forward exchange rates and purchase amount. 3. Question 5 provides information to calculate the net present value of a potential $10 million foreign investment by a US company, accounting for political risk, cash flows blocked by the foreign government, and the company's higher cost of capital

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    Strayer FIN 534 Homework Ch.17

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    1. The document provides information about a homework assignment involving foreign exchange rates and currency risk. It includes 5 questions about interest rate parity, forward exchange rates, hedging currency risk, purchasing power parity, and calculating the net present value of a foreign investment project. 2. Question 3 asks about hedging currency risk on a foreign purchase by a US importer, and calculates that hedging saved the importer $638 based on the spot and forward exchange rates and purchase amount. 3. Question 5 provides information to calculate the net present value of a potential $10 million foreign investment by a US company, accounting for political risk, cash flows blocked by the foreign government, and the company's higher cost of capital

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    375 views2 pages

    FIN 534 Homework Ch.17

    Uploaded by

    pokadotloknot
    1. The document provides information about a homework assignment involving foreign exchange rates and currency risk. It includes 5 questions about interest rate parity, forward exchange rates, hedging currency risk, purchasing power parity, and calculating the net present value of a foreign investment project. 2. Question 3 asks about hedging currency risk on a foreign purchase by a US importer, and calculates that hedging saved the importer $638 based on the spot and forward exchange rates and purchase amount. 3. Question 5 provides information to calculate the net present value of a potential $10 million foreign investment by a US company, accounting for political risk, cash flows blocked by the foreign government, and the company's higher cost of capital

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    FIN 534 Homework Chapter 17

    1. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180- day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT? a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market. 2. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a to the spot rate. d. discount of 8% The amount of the discount is calculated as: (Forward rate Spot rate)/Spot rate. 3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure? e. $638 Saving = (Spot rate (purchase) - Spot rate (actual))*Amount of money S = (1.665 - 1.638)*24,000 = $638 4. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland? b. 454.55 Swiss francs $1 = 1.65 Swiss francs $ 750 = X X= $750/ 1.65 =454.55 Swiss francs

    5. Chen Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the projects NPV? c. $3.09 million 0 Investment - 10 Cash Flow forecasted Cash flow after blocking 1 4 3,2 2 4 3,2 3 6 4,8 4 6 4,8 5 5 4

    Kd CF d NPV

    1 -10 -10

    0,8696 0,7561 0,65752 0,5718 0,4972 2,7826 2,4197 3,15608 2,7444 1,9887 -7,2174 -4,7977 -1,6417 1,1028 3,0915

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