...spot rate of the Malaysian ringgit is $.30 and the six month forward rate of the ringgit is $.32, what is the forward premium or discount on an annual basis? A. premium; about 14.5% B. discount; about 14.5% * C. premium; about 13.3% D. discount; about 13.3% E. premium; about 16.7% Solution: use Equation (5-4) [(.32 - .30)/.30] x (360/180) = 13.3% 18. If the spot rate of the Israel shekel is $.32 and the six month forward rate is $.30, what is the forward premium or discount on an annual basis? A. discount; 11.5% B. premium; 11.5% C. premium; 12.5% * D. discount; 12.5% E. premium; 22.5% Solution: use Equation (5-4) [(.30 - .32)/.32] x (360/180) = -12.5% 19. If the Canadian dollar is equal to $.86 and the Brazilian real is equal to $.28, what is the value of the Brazilian real in terms of Canadian dollars? * A. about .3256 reals B. about .3568 reals C. about 1.2 reals D. about 1.5 reals E. about .5600 reals Solution: cross rate .28/.86 = .3256 20. If the Japanese yen was worth $.0035 six months ago and is worth $.0045 today, how much has the yen appreciated or depreciated? * A. appreciated; about 29% B. appreciated; about 25% C. depreciated; about 20% D. depreciated; about 18% E. appreciated; about 15% Solution: use Equation (5-1) (.0045 - .0035)/.0035 = 29% 21. Assume: (1) the US annual interest rate = 10%;...
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...Bernie Madoff was born on April 29, 1938, in Queens, New York, Bernard was born to polish immigrants, work for many years as a plumber. Bernie married Sylvia his wife they had one daughter, son. Bernie had hard times during the Great depression so in 1950 he got involved in finance. Ponzi scheme The unethical research behavior was involved was the hedge funds scheme were he would have to sell or liquidate holding from one hedge funds to keep down pressure on the stock prices. When doing this it will keep the negative pressure off the stock exchange. Berine had celebrity connections from Kyra Sedwick, Kevin Bacon, Tom hanks, and many more people that invested in the hedge funds at first they were getting returns back at 10% return. The company was growing and he was hiring more family members. The person that was hurt by this scheme was his family, friend, and the people that he told he lost 50 million dollars in the stock exchange. His own son turner he in after his father was giving out 12 million bonuses. When asked where the money did come from “Madoff then admitted that a branch of his firm was actually an elaborate Ponzi scheme”. His son turned him in the next day to the federal authorizes. People have the loss of...
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...Economics 2 (2006) 129-146 EXCHANGE RATE RISK MEASUREMENT AND MANAGEMENT: ISSUES AND APPROACHES FOR FIRMS MICHAEL G. PAPAIOANNOU, Ph.D. International Monetary Fund Abstract Measuring and managing exchange rate risk exposure is important for reducing a firm’s vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm’s exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical vs. strategical and passive vs. active hedging. In addition, it outlines a set of widely-accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by US firms. JEL Classification: F31, G13, G15, G32, M21 Keywords: Financial Risk, Financial Management, Foreign Exchange Hedging, Corporate Hedging Practices Corresponding address: 700 19th Street, N.W. Washington, DC 20431 e-mail: mpapaioannou@imf.org This paper draws heavily on various presentations on risk management while the author was the Director of Foreign Exchange Service of the WEFA Group...
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...Affiliation] Multinational Finance Assignment Introduction This paper is based on the foreign exchange theories and the strategies used to minimize the risk of foreign exchange. The scenario is about the two multinational airlines. One is United States Airline and the other is Lufthansa (German) airlines. Both of them are exposed to foreign exchange risks as their transactions is in different currencies. In the scenario, U.S airlines has order from France the Airbus so, they have to pay France in Euro currency. However, United States airlines report their financials in Dollars. So, any slight change in Euro will impact the profits of United States Airlines. On the other hand, we have the case of Lufthansa Airlines which is purchasing a Boeing from USA and their reporting currency is Euro. So, both of the airlines are exposed to risks in the scenarios. This paper will address the foreign exchange theories involved in the case and strategies that will help these two airlines minimize their risk of currency fluctuations. The paper will also show calculations and the instruments used to minimize foreign exchange risks and calculating profits. Analysis of Foreign Exchange market theories in the scenario Foreign exchange market is the one which involves foreign currencies like euro, pounds or yen and it the one that is traded from local currency for e.g. the dollar. The network of foreign exchange is a decentralized one and is not in a centralized location. It is nevertheless integrated...
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...Volatility of exchange rate The main objective of this research is to present a rationalized concept of the theory and composition of exchange rate that are compulsory to solve the important economic problems facing the economy in the country, like volatile exchange rate, unbalanced financial circumstances and frustration of government to have control over domestic money market. “Exchange rate” shows that how much unit of onenation’s currency can be purchased with one unit of domestic currency. More precisely, exchange rate is a conversion factor that determines rate of change of currencies. While exchange rates volatility shows that exchange rate is settled on demand and supply of one nation’s currency, it may turn out fastest moving price of currency and bring all the foreign capital in the economy. Exchange rate volatility can influence the decisions of policy makers and affect the volume of exports and imports. It can also affect the allocation of manufacturing of goods, reserve money, exports, imports and balance of payments. Exchange rate volatility provides chances to domestic investors to invest in foreign currency to obtain higher profits and thus domestic currency undervalue and foreign currency gain values. Moreover, this volatility of exchange rate directly influences the prices of exports, imports, reserve money, manufacturing productions and their growth rates. Traders and investors always support the system where the discrepancy of the difference between actual...
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...seekers, Production efficiency seekers, Knowledge seekers, Political safety seekers Globalization process -Stage I: early domestic phase growing into the international trade phase, Stage II: A successful firm will continue to grow from simple international trade to the multinational phase characterized by production and investment both at home and abroad Twin agency: Chapter 2 Corporate Ownership, Goals, and Governance Who Owns the Business The Goal of Management two models: 1.shareholder wealth maximization(max return&min risk): market efficient&risk exsit, unsystematic risk can be diversified, systematic risk can be eliminated. Replace, take-over, vote/share 2.stakeholder capitalism model(labor union, government interfere, max income): not assume efficient or not, total risk-operating&financial risk count, long-term loyal shareholders Operation goals for MNE(incompatible): maximization of consolidated after-tax income; minimization of the firm’s effective global tax burden; correct positioning of the firm’s income, cash flows, and available funds as to country and currency...
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...BACKER ADHESIVES CASE STUDY | Foreign Exchange Risk Management | Date | 3, Sep, 2014 | | | | Paper | Managing Global Business | Lecturer | Dr. Romie Littrell | | | | Student | Siyoung Jo / Zongjie Liu / Kathy Liu | Introduction Brief Company Situation Baker Adhesives is a small company which made specialty adhesives in USA. Market was dominated by a handful of big competitors with international access and slim margins. Baker specialized in accommodating specialty markets with consistent sales and relatively high margins. However, US Manufacturers were relocating overseas and achieved “Economy of Scale”. Therefore Baker Adhesives would be under intense pressure of finding markets abroad. Baker had no long debt but line of credit of USD 180,000 and had an excellent relationship with the local bank from the beginning. The production facilities are old but were readily adaptable and had been well maintained. Baker also possessed a good chemist and a flexible production system, even though his father who was a brilliant chemist and the founder of this company had recently retired. * 2. Problem finding In Feb. 2006, Baker’s first international foray was dealing with Brazilian toy manufacturer Novo of 1,210 gallons. Novo was considering a second order 50% larger than original one. Baker was excited about the fact that they can expand their business to abroad as well as they can generate big margins from their sales with Novo. ...
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...Prof. Dr. Streitferdt International Financial Management Winter semester 2015/16 1. Prologue 1. Prologue 2. Foreign exchange markets 3. Foreign exchange exposure management 4. Financial management of multinational corporations 5. Financial management of multinational corporations 6. Corporate Governance 7. Mergers & Acquisitions 8. Risikomanagement Prof. Dr. Streitferdt: International Financial Management 1 1. Prologue Discounting Calculating present value 0 t=1 t=2 t=3 2,000 t=0 4,500 3,000 t=4 t=5 3,500 6,000 How much would you be willing to pay for this stream of future cash flows, if the interest is at i = 5.65%? Why is the result today’s value of the future cash flows? What are the assumptions of this calculation? Prof. Dr. Streitferdt: International Financial Management 2 1. Prologue Discounting Calculating present value 10/28 10/14 6,000 0 How much would you be willing to pay for this stream of future cash flows, if the two week Euribor is at i = 5.65%? What makes this calculation different from the last slide’s calculation? How many days has a year? Prof. Dr. Streitferdt: International Financial Management 3 1. Prologue Discounting Interests for investments with less than one year maturity Interests are always quoted for one year: A company has in 2012 an overdraft credit of 100,000 €...
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...questions. Past exam questions: 1. Market Risk for multi-period horizons and portfolios An Australian bank has long positions of 1 million US dollars and 1 million Swiss Francs. The closing exchange rates yesterday were AU$1.5/US$ and AU$1/SWF. The historical average value of daily exchange rate return is zero for both AU$/US$ and AU$/SWF. The standard deviations of daily exchange rate return for AU$/US$ and AU$/SWF are 50 basis points and 100 basis points respectively. The historical correlation between the two exchange rate returns is 0.5. a) If the daily exchange rate returns for both AU$/US$ and AU$/SWF follow a normal distribution and independent across dates (i.e., the serial correlation in daily exchange rate returns is zero), what is 10-day VaR for the bank’s aggregate holdings of two currencies? b) Assume for this question that the daily exchange rate returns for AU$/SWF do not follow a normal distribution and not independent across dates either. Based on the historical data, there is typically 5% of chance that SWF will depreciate by more than 150 basis points relative to AU$ in 10 days, and there is also 5% of chance that SWF will appreciate by more than 100 basis points relative to AU$ in 10 days. What is 10-day VaR for the bank’s SWF position? 2. Foreign exchange risk a) OZ Bank issues a one-year Australian certificate of deposit to finance a US$1 million investment in one-year fixed rate U.S. bonds. The interest rate of AU$ CD is 5% per annum. and the...
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...Journal, vol. V, no. 2, 2008, pp. 81-91 FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO Sathya Swaroop Debasish Department of Business Management Fakir Mohan University Vyasa Vihar, Balasore - 756019 Orissa, INDIA ABSTRACT Indian economy in the post-liberalisation era has witnessed increasing awareness of the need for introduction of various risk management products to enable hedging against market risk in a cost effective way. This industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practices and derivatives product usage by large non-banking Indian-based firms. The study is exploratory in nature and aims at an understanding the risk appetite and FERM (Foreign Exchange Risk Management) practices of Indian corporate enterprises. This study focusses on the activity of end-users of financial derivatives and is confined to 501 non-banking corporate enterprises. A combination of simple random and judgement sampling was used for selecting the corporate enterprises and the major statistical tools used were Correlation and Factor analysis. The study finds wide usage of derivative products for risk management and the prime reason of hedging is reduction in volatility of cash flows. VAR (Value-at-Risk) technique was found to be the preferred method of risk evaluation by maximum number of Indian corporate. Further, in terms of the external techniques for risk hedging, the preference is mostly in favour of...
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...helps enable American students to travel abroad. The main service AIFS provides entails organizing educational and cultural exchange problems across the globe. As the case explains, AIFS has split their business into two major divisions that that serve American student’s studying abroad; the Study Abroad College division and the High School Travel division. The college division, which is controlled by Christopher Archer-Lock, sends American students all over the world on semester-long exchange programs. The high school division, which was founded as the American Council for International Studies (ACIS), is controlled by Becky Tabaczynski and sends high school students and their teachers on 1-4 week long trips. This nature of business involves a certain amount of bottom-line risk. AIFS focuses largely on American students studying abroad, therefore the majority of their revenue is in American Dollars (USD). However, AIFS costs’ are generally incurred in foreign currency (primarily Euros (EUR) and British Pounds (GBP)) because the services they arrange for happen abroad. Due to their business activities involving foreign currencies, an unfavorable change in the exchange rate could result in a higher cost base, and potentially a loss overall if the change is significant enough. Inherently, due to the nature of their business, AIFS is exposed to currency risk because they are dealing in multiple currencies, however there is another factor that gives rise to currency exposure as...
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...company is faced with the difficult decision of how they will react to the constant change in currency exchange rates. Pixonix is very susceptible to failure and losses as a result of this fluctuating exchange rate. This is known as the foreign exchange risk. At present, the Canadian dollar is valued above the US. dollar, but if the Canadian dollar dips, it could have a unfavorable fiscal outcome for Pixonix when it comes time to purchasing new tools and software in US dollars. On the other side of this, if the Canadian dollar continues to rise above the US dollar, Pixonix may have trouble selling their products to US consumers. There are a number of ways that Pixonix can insure against the foreign exchange risk, but Cain has no previous experience in these strategies. Analysis of Problems The exchange rate fluctuation is a concern for any Canadian company because the US market also drives the Canadian market. That being said, Pixonix is affected by the exchange rate fluctuation specifically because it licensed tools and software for an annual cost of $7.5 US. This is a significantly different number in Canadian dollars if the exchange rate of $1 Canadian is worth $1.0717US. Cain is concerned about the fluctuating Canadian dollar because she needs to convert Canadian dollars to US dollars to pay for the tools and software she licensed. The Canadian dollar is at a great rate for Pixonix right now because it is cheaper for her company to buy products from the US if this stays...
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...Classnote Prof. Gordon Bodnar Techniques for Managing Exchange Rate Exposure A firm's economic exposure to the exchange rate is the impact on net cash flow effects of a change in the exchange rate. It consists of the combination of transaction exposure and operating exposure. Having determined whether the firm should hedge its exposure, this note will discuss the various things that a firm can do to reduce its economic exposure. Our discussion will consider two different approaches to handling these exposures: real operating hedges and financial hedges. Transaction Exposure Financial Techniques of Managing Transaction Exposure Transaction exposure hedging should have been discussed in some detail in the previous international finance course; however, we will briefly go over the standard financial methods available for hedging this exposure. The main distinction between transaction exposure and operating exposure is the ease with which one can identify the size of a transaction exposure. This, combined with the fact that it has a well-defined time interval associated with it makes it extremely suitable for hedging with financial instruments. Among the more standard methods for hedging transaction exposure are: i) Forward Contracts - When a firm has an agreement to pay (receive) a fixed amount of foreign currency at some date in the future, in most currencies it can obtain a contract today that specifies a price at which it can buy (sell) the foreign currency at the specified...
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...Virtual Organization Strategy for Kudler Fine Foods For many organizations, strategic decisions play an important role in how the organization plans to expand its business and its profits. There are many factors management must consider before making a final decision as to which approach will provide the most benefits as well as bringing in the most capital. Each approach considered will present strengths, weaknesses, opportunities, and risks that management must carefully consider. Each approach will also have an impact on the organization’s decision should they decide to pursue an international location. The decisions management faces are not easy ones and they must carefully determine the best strategic approach or run the risk of financial ruin. Kudler Fine Foods Kudler Fine Foods is one such organization looking to expand its operations. Currently, Kudler Fine Foods owns and operates three stores all based in the San Diego, California area. Kudler Fine Foods, an upscale specialty foods store offering domestic and foreign foods as well as spirits to its customers, began in mid-1998 and within nine months was already making a profit. Kudler Fine Foods opened two additional stores, one in 2000 and one in 2003 (Apollo Group, 2011). Because business has been so good, management is looking at another possible expansion and is seriously considering the options available. In order to make the most beneficial as well as profitable decision, management must take its time and...
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...Answer: Foreign Direct Investment: FDI occurs when a frim invest directly in facilities to produce or market product in a foreign country. The Theories of FDI: Theroies of FDI may be classified under the following------ 1. Production or product Cycle Theory of Vernon 2. The theory of Exchange Rate on Imperfect Capital Market 3. The Internalisation Theory 4. The Eclectic Paradigm of Dunning Production or product Cycle Theory of Vernon Production or product theory developed by Vernob in 1966 was used to explain certain types of FDI. He believes that there are four stage of production cycle— * Innivation * Growth * Maturity * Decline. Vernon’s production life-cycle suggest that frims undertake FDI at particular stage in the life cycle of products they have developed or produced. However, Vernon’s theory does not adresss the issue of whether FDI is more efficient than exporting or licensing for expanding abroad. The theory of Exchange Rate on Imperfect Capital Market: This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. However, currency risk rate theory cannot explain simultaneous foreign direct investment between countries with different currencies. The sustainers argue that such investments are made in different times, but there are enough cases that contradict these claims. The Internalisation Theory This theory tries to explain the...
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