...FINC6013 Workshop 6 Questions & Solutions Chapter 3 PROBLEMS 6. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in connection with a shipment of computer chips that Sony is purchasing from Intel. Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that the dollar will weaken by 1% over the next 90 days, and that the standard deviation of 90-day forecasts of the percentage rate of depreciation of the dollar relative to the yen is 4%. a. Provide a qualitative description of Intel’s transaction exchange risk. Answer: Intel is a U.S. company, and it is scheduled to receive yen in the future. A weakening of the yen versus the dollar causes a given amount of yen to convert to fewer dollars in the future. This loss of value could be severe if the yen depreciates by a significant amount. b. If Intel chooses not to hedge its transaction exchange risk, what is Intel’s expected dollar revenue? Answer: If Intel chooses not to hedge, the expected dollar revenue is the expected dollar value of the ¥100,000,000. The expected spot rate incorporates a 1% weakening of the dollar. This means that the expected yen price of the dollar is 1% less than the current spot rate of ¥103/$ or Et[S(t+90,¥/$)] = 0.99 [pic]¥103/$ = ¥101.97/$ Hence, Intel expects to receive ¥100,000,000 / ¥101.97/$ = $980,681 c. If Intel does not hedge, what is the range of possible dollar revenues that incorporates 95.45% of the...
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...International Finance: A Course Overview Mihir A. Desai* Harvard University and NBER ABSTRACT This paper describes the International Finance course at Harvard Business School for instructors considering adopting the associated material. The paper begins by arguing that the forces of globalization have fundamentally changed the scope and activities of firms thereby altering the practice of finance within these firms. As a consequence of an increasing reliance on tightly-integrated foreign operations, a parallel world of finance has been opened within every multinational firm and this world has, heretofore, been overlooked. The course materials are designed to address the many aspects of financial decision making within global firms prompted by these changes that are not addressed in traditional materials. The paper provides an overview of the structure of the course and its seven modules with particular emphasis on the three modules that constitute the core of the course. The paper also describes an analytical framework that has been developed through the creation of the course materials to guide critical financial decisions on financing, investment, risk management and incentive management within a multinational firm. This framework emphasizes the need to reconcile conflicting forces in order for multinational firms to gain competitive advantage from their internal capital markets. The paper concludes with a discussion of the course's pedagogical approach and detailed descriptions...
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...Company Understanding the tax implications of equity derivatives and the application of these instruments for taxable U.S. clients is a challenge worth meeting. Equity derivatives can playa useful role in implementing tax-efficient strategies that maximize after-tax returns. The key is to understand the costs, benefits, and rules for applying each instrument or strategy and then to select the best instrument to accomplish the investor's objectives and minimize the taxes. istorically, u.s. trust departments that managed money for taxable investors were restricted in their use of derivative securities. Because of such obstacles (some of which are a matter of education more than anything else), derivatives are not the first tool that comes to mind for managing taxable investments, even though they offer advantages for many clients. Derivatives are often perceived as complex in themselves; the roles derivatives can play when taxes are involved add yet another layer of complexity. Equity derivatives, independent of any tax motivation, are used for reducing the risk of holding equities or as efficient substitutes for equities. In both contexts, derivatives have natural applications in tax-related strategies. This presentation discusses the general tax issues facing corporate money managers or high-networth individuals with respect to equity derivatives, explains how to use derivatives to maximize after-tax portfolio returns, discusses specific tax-efficient derivative strategies...
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...International Finance & Global Capital Markets Exposure Management Himanshu Bhutani A014| Dawood Bukhari A015 Shibani Gujrati A025| Siddhant Anthony Johannes A033 Nishtha Sardana A054| Prateek Walia A063 1 INDEX 1. Introduction…………………………………………………………………………………..3 2. Operational Exposure………………………………………………………………………..9 3. Transaction and Translation Exposure…………………………………………….……..11 4. Other Strategies used by Companies to Hedge Exposure……………………...………19 5. Case Studies: Hedging Strategy used by Companies………………………….………..20 2 INTRODUCTION Foreign exchange exposure represents a material risk for multinational corporations which are unrelated to business operations. One needs to identify each foreign exchange exposure, the risk it represents and methods and costs available to limit such exposure. The value of a firm’s assets, liabilities and operating income changes continuously due to change in factors such as exchange rates, interest rates, inflation etc. In other words, a firm is “exposed” to uncertain changes in a number of variables in its environment. Exposure may therefore be defined as a measure of sensitivity of the value of a financial item to changes in the macro economic variables mentioned above. Risk refers to the variability of the value of the item. FOREIGN EXCHANGE EXPOSURE Foreign Exchange Exposure occurs because of unanticipated change in the exchange rate. For example the difference in the spot rate & one month forward rate is 0...
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...Answers Professional Level – Options Module, Paper P4 Advanced Financial Management 1 December 2010 Answers Up to 4 professional marks are available for the presentation of the answer, which should be in a report style. The decision should be taken in the best interests of the shareholders and other stakeholders of the company. Obviously all the input numbers should be considered on basis of their reasonableness and accuracy. Hence the positions of the interested parties will be considered on this basis. 1. Cease Trading and Liquidate the Company This is probably not in the best interest of any party. Debt holders only receive 55·7c for every $1 invested and the shareholders receive nothing (see appendix, proposal 1). Furthermore, the parts division is continuing to make a profit and should possibly continue. The Board may want to consider closing just the fridge division, and focusing on the parts manufacturing division, with the possibility of pursuing the option of the mobile refrigeration business. However, in this case, the problem of the lack of funding might continue. 2. Corporate Restructuring and Management Buy-Out Shareholders The shareholders would benefit from either proposal two or three, as opposed to the first proposal, as they stand to gain some funds. The restructuring proposal requires them to pay $40m cash for new shares but lose their control of the company (the shareholding falls to just under 13%). On the other hand the statement of financial position...
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...Part C Part D Part E Preliminaries: Conventions, notation, and basic concepts Currency markets and the behavior of the exchange rate Markets for exchange-rate derivatives and the hedging decision Why hedge exposure to exchange rates Measuring and managing exposure to exchange rates The market for currency futures The market for currency options Markets for fixed income securities and the financing decision Markets for equities and the portfolio investment decision Foreign direct investment Fall 1999 International Finance: Chapter 6 – Why hedge 6-3 Contents 6.1 Main issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Motivating problems . . . . . . . . . . . . . . . . . . . . . . 6.3 Implications of empirical evidence on exchange rate behavior . 6.4 When is value of a firm independent of its hedging policy 6.5.1 6.5.2 6.5.3 6.5.4 6.5.5 4 5 6 7 9 10 15 17 22 23 . . 6.5 How can hedging increase the value of a firm . . . . . . . . . Corporate hedging reduces costs of financial distress . . . . . . . . “Home-made” hedging is not an efficient substitute for corporate hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hedging reduces agency costs . . . . . . . . . . . . . . . . . . . Hedging reduces expected taxes . . . . . . . . . . . . . . . . . . . Hedging may provide better information for internal decision-making 6.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 Recommended readings 6.8 Practice problems...
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...be managed by experts on an integrated basis with other financial risks and overseen by the financial risk management committee. This case study explains how organisational changes, combined with the introduction of risk management technology, enabled the organisation to plan and execute a consistent, cost-effective hedging strategy, with reduced counterparty risk exposure levels, improved transparency and stronger levels of control. Coca-Cola Hellenic Bottling Company (Coca-Cola HBC) is the world’s second largest bottler of the Coca-Cola Company’s products and the largest in Europe. Net sales revenue for fiscal 2012 was €6.8bn. Coca-Cola HBC is headquartered in Zug, Switzerland, and has a premium listing on the London Stock Exchange and a secondary listing on the Athens Exchange. It serves approximately 581m people in 28 countries. The company decided to concentrate its commodity market risk management within the treasury department, in response to high levels of profit and loss (P/L) volatility and the relatively high credit risk with its suppliers. The ensuing project involved change management for transfer of the company’s commodity risk hedging to treasury, the selection and implementation of a new technology solution and putting in place a reporting environment that would provide the necessary levels of understanding to support decision taking in line with the organisation’s risk appetite. The project described below won the risk management award in the 2013...
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...Placido Garcia Week #2 Exercise 15.2: External Financial Reports and Globalization. a. The Headquarters of General Electric Company is in Fairfield, CT United States and operates in more than 170 countries around the world. b. The proportion of total sales represented by foreign sales is about $80 billion of revenue outside the Unites States. The changes of sale over the past five-years have shown increases 3 out 5 years. The other 2 years were slightly below the company’s goal due to the price of oil dropping and exports issue. c. They signed an agreement to sell their consumer finance business in Hungary (Budapest Bank) to Hungary’s government. On June 2, 2014, we acquired Cameron’s Reciprocating Compression division for $0.6 billion. The division provides reciprocating compression equipment and aftermarket services for oil and gas production, gas processing, gas distribution and independent power industries d. There are three categories GE uses hedging practices. FAIR VALUE HEDGES GE use interest rate and currency exchange derivatives to hedge the fair value effects of interest rate and currency exchange rate changes on local and non-functional currency denominated fixed-rate debt. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in earnings within interest and other financial charges, along with offsetting adjustments to the carrying amount of the hedged debt. CASH FLOW HEDGES GE use interest rate, currency...
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...by a specific date. The benefit of granting options to employees is viewed as a good thing because it (theoretically) aligned the interests of the employees (normally the key executives) with those of the common shareholders. If a material portion of a CEO's salary were in the form of options, she or he would be incited to manage the company well, resulting in a higher stock price over the long term. The higher stock price would benefit both the executives and the common shareholders. Substituting options is supposed to keep executives eyes on the long term since the potential benefit (higher stock prices) would increase over time. Also, options programs require a vesting period (generally several years) before the employee can actually exercise the options. This is in...
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...-equal access to mkt prices -rational investors -equal access to costless information MM’s irrelevance proposition o With = access to perfect financial mkts, individuals can replicate any financial action that the firm can take o This leads to MM’s famous irrelevance proposition: -if financial mkts are perfect, then corporate financial policy is irrelevant The converse of MM’s irrelevance proposition o If financial policy is to increase value, then it must either -increase the firm’s expected future cash flows or -decrease the discount rate in a way that cannot be replicated by individual investors. Financial Mkt integration v Segmentation o In integrated financial mkts, real after tax rates of return on equivalent asset are = o Factors contributing to segmentation include: -prohibitive transactions costs -different legal and political systems -regulatory interference (eg barriers to financial flows) -different taxes -information barriers -home asset bias (a tendency to buy financial assets in the domestic market) -differential investor expectations Project valuation and the cost of capital ➢ Alternative approaches to project valuation -WACC: weighted average cost of capital -APV: adjusted present value ➢ Use of an asset specific discount rate that reflects the opportunity cost of capital...
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...negative implications at the bottom line of the corporate, banks, FI and trading houses P&L A/cs. That is something risk management struggles with, say the experts. In Richard Meyers’ estimation, risk managers or traders do not socialize enough. “It’s all about visibility,” he said. Meyers, chairman and CEO of Richard Meyers & Associates, a talent acquisition and management firm in New Jersey, relates the story of a firm that decided to adopt an Enterprise Risk Management (ERM) strategy. Instead of appointing its risk manager to head ERM, the company brought in someone else. Why? Time has come when organizations across the world have to do deep amendments in their Enterprise Risk Management (ERM) policies covering foreign exchange hedging programs, diversification in derivatives portfolio, Enterprise risk management policies and deeper and deeper understanding towards financial models. With this background paper would...
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...Solutions to End-of-Chapter Questions and Problems in Multinational Finance by Kirt C. Butler Second Edition PART I Overview and Background Chapter 1 Introduction to Multinational Finance Answers to Conceptual Questions 1.1 Describe the ways in which multinational financial management is different from domestic financial management. Multinational financial management is conducted in an environment that is influenced by more than one cultural, social, political, or economic environment. 1.2 What is country risk? Describe several types of country risk one might face when conducting business in another country. Country risks refer to the political and financial risks of conducting business in a particular foreign country. Country risks include foreign exchange risk, political risk, and cultural risk. 1.3 What is foreign exchange risk? Foreign exchange (or currency) risk is the risk of unexpected changes in foreign currency exchange rates. 1.4 What is political risk? Political risk is the risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate. 1.5 In what ways do cultural differences impact the conduct of international business? Because they define the rules of the game, national business and popular cultures impact each of the functional disciplines of business from research and development right through to marketing, production...
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...investments (FDIs). Foreign direct investments are simply business entities operated by a corporation in one country (the home country) but with subsidiaries in the foreign markets (the host countries) (Agarwal, 2009).A perfect example for FDIs is Multinational Corporations (MNCs) which have their parent company located in their home country but with subsidiaries in foreign markets. In most cases, FDIs are operated through joint ventures, franchises or mergers where the parent company of the MNC acquires other businesses in overseas markets (Chaurasia, 2008). The objective of this assignment, therefore, is to discuss and explain further the operations of MNCs and issues surrounding these corporations. Hedging Transaction Exposure Four of the Hedging Techniques Available To MNCs Hedging simply means minimizing or mitigating the effect of the exchange rate exposure. This risk is of three types namely, translation exposure, economic exposure and transaction exposure (Luo, 2001). A transaction exposure is a form of foreign exchange risk which results to loss or gains when operations are carried out or denominated in foreign currency (Hill, 2005). It is a short-term exposure that arises as a result of fluctuations in exchange rates. To mitigate or hedge the effects of this risk, an MNC can use any of the following four techniques. When selecting the method to apply, MNCs compare the expected cash flow from each one of these. A).Futures Hedge- to lock in the future exchange rate, a...
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...Advanced Corporate Finance [FN2] Examination Blueprint 2013/2014 Purpose The Advanced Corporate Finance [FN2] examination has been constructed using an examination blueprint. The blueprint, also referred to as the test specifications, outlines the content areas covered on the examination and the weighting allotted to each content area. This document also lists the topics, the level of competence for each topic, and the related learning objectives and competencies. The learning objectives have been designed to ensure that the competencies are met. In addition, information is provided on the proportion of each question type presented in the examination (that is, multiple choice, quantitative problems, and so on). Use Candidates should use the examination blueprint to prepare for the course examination. The blueprint may not include all the topics listed in the course materials; however, candidates are still responsible for acquiring a broad-based knowledge of all topics not listed in the blueprint since these topics will be tested in assignment and review questions. The topics not listed in the blueprint will also provide candidates with a greater depth of understanding of finance concepts. Examination Objectives The objective of the 4-hour comprehensive examination is to test CGA candidates on the prerequisite knowledge required for advancement into PA1 and PA2, so as to ensure that the candidates have the broad-based knowledge in finance needed to function properly in the association’s...
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...e Finance Notes: Week 1 (Chapter 1) The Financial System Chapter Aims • Outline the functions of the Australian financial system • Identify the elements of the Australian financial system Overview of Financial Systems • A financial system facilitates financial transactions through the creation and transfer of financial assets • The key elements of the Australian financial system are □ Financial instruments □ Financial markets □ Financial institutions Functions of a Financial System • Facilitates the efficient flow of funds between lenders and borrowers via financial instruments • Allows individuals to allocate funds according to current and future consumption • Facilitates the implementation of government monetary policy Financial Instruments • Attributes of financial instruments □ Return or yield □ Risk □ Liquidity □ Time pattern of cash-flows 1. Equity □ Shares represent an ownership position □ An entitlement to share in the profits of the organisation □ Equity types – Ordinary shares – Preference shares – Quasi-equity instruments 2. Debt □ Debt instruments represent a contractual claim on the borrower to make specific payments in the form of interest and principal amounts □ Debt may be issued with a fixed or floating interest rate, or at a discount, secured or unsecured, short or long-term 3. Derivates □ Derivate instruments...
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