Carefour S.A. 1. What does interest‐rate parity say about international borrowing costs? What can a firm do to manage the exchange‐rate risk of foreign‐currency borrowing? How can Carrefour use Carrefour S.A. is a retail corporation located in france. The risk that as business’s operation or an invesment’s value will be affected by change in exchange rate. Carrefour is exposed to exchange rate risk because of foreign currency exposure from imported goods. This risk was being hedge by forward contract. Carrefour has a large exposure risk to the euro because of their hedging policy. Merton Electronics Case 2. What is currency‐risk exposure? How is it measured?

Currency risk exposure is the dollar amount that is at risk if exchange rates move in an unfavorable direction. A company has currency exposure when the currencies for its expenditures and revenues are not the same. Future payments or distributions payable in foreign currency carry the risk that the foreign currency will depreciate in value before the foreign currency payment is received and converted into US dollars. Although there is a chance for profit, most businesses and lenders give up that chance in order to eliminate the risk of currency exchange loss. It is measured as the amount in receivables or payables the company has committed to, for which the exchange rate has not been determined A currency is exposed to exchange rate fluctuations to the extent that it is used to conduct transactions with external markets. The greater the proportion of “inter‐currency” exchange to total monetary transactions for a given market, the greater the exposure to changes in exchange rates. Businesses conducting international trade are exposed to exchange rate fluctuations in proportion to their total volume of transactions. As the magnitude of “inter‐currency transactions” increases relative to aggregate transactions, a business unit realizes greater exposure to exchange rate fluctuations. By defining currency exposure as the proportion of “inter‐currency transactions” to total transactions, greater management attention can be aimed at operations with a high degree of exposed risk to exchange rate changes If Merton Electronics were to not hedge their currency risk exposure, the value of their payables will fluctuate with the value of the Yen. As can be seen in the graph below, if the Yen appreciates against the dollar, Merton will lose money due to their exposure. If the Yen depreciates, Merton will make a profit due to their exposure. By entering into a forward contract hedge, Merton could lock in the exchange rate that they will pay in three months, now. This exchange rate would be $0.7952 per ¥100. Therefore, Merton could eliminate the risk of the Yen appreciating. However, if the Yen depreciated, Merton has forfeited these possible gains.