...Baker agrees to the new Novo sale, determine the present value of the expected future cash inflow assuming: (1) there is no hedge, (2) the company hedges using a forward contract, and (3) the company hedges using the money market. No hedge: Present Value: 86.23 * 1815= BRL 156,362.25 BRL 156,362.25 * .4368= $68,299.03 Future Value: BRL 156,362.25 * .4234= $66,203.78 Hedge using forward contract: Present Value: 66,094.32 / (1 + .0215)= $64,703.20 Future Value: BRL 156,362.25 * .4227= $66,094.32 Hedge using money market: Present Value: BRL 156,362.25 / (1 + .065)= BRL 146,819.01 BRL 146,819.01 * .4368)= $64,130.54 3. Are the money markets and forward markets in parity? The above data shows the calculations for the present value of the expected future cash inflow assuming there is no hedge, the company hedges using a forward contract, and the company hedges using the money market. These calculations are done using the current price per gallon of adhesives at 86.23 in Brazilian Real. As you will see below we take into account the change in material cost and find the new price per gallon of the adhesive. This turns out to be 88.39 and we go on to calculate the new present value of the expected future cash inflow assuming there is no hedge, the company hedges using a forward contract, and the company hedges using the money market. The data below shows that the money markets and forward markets are not in parity. We come to this conclusion...
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...exchange-rate movements have reduced the value of the sale. A follow-on order provides the context for exploring possible mechanisms for managing that risk. In particular, sufficient direction and information is provided to examine both a forward hedge and a money-market hedge. The learning objectives of the case are as follows: * To explore the magnitude and effect of exchange-rate risks. * To illustrate exchange-rate risk management through two conventional hedges—a forward-contract hedge and a money-market hedge. * To demonstrate market parity and identify how preferences arise from unique company characteristics. * To explore issues related to pricing of international bids. Suggested Questions 1. How profitable is the original sale to Novo once the exchange-rate changes are acknowledged? How might the exchange-rate risk, which affected the value of the order, have been managed? 2. Assuming Baker agrees to the new Novo sale, determine the present value of the expected future cash inflow assuming: (1) there is no hedge, (2) the company hedges using a forward contract, and (3) the company hedges using the money market. Finding a present value is necessary for the following reason: With no hedge or a with forward-contract hedge, the cash flow will occur at the time of payment by Novo. With the money-market hedge, Baker receives a cash flow...
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...Synthetic Forward and PutCallParity A synthetic long forward can be created by purchasing a call option and writing a put option with the same strike price and the same expiration date. Let’s say, that an investor buys a $500‐strike call option and sells a $500‐strike put option, both options have the same expiration time T. At T, the spot price will be equal to, above or below the strike price. If the spot price is above the strike price K, the investor will exercise the call option and buy the underlier for $500. The put will not be exercised. If the spot price is below the strike price the written put will be exercised against the investor, forcing him to buy the underlier at $500. The call will expire worthless. In either case, the underlier will be purchased at the strike price. The payoff of this combined position is max{0, S - K}- max{0, K - S} = S - K Call Put but this is actually the payoff of a long forward contract expiring at time T and with a forward price of $500. Be aware of the differences between an original long forward and a synthetic long forward: (i) the original long forward has no upfront premium payment while the synthetic long forward requires a net option premium (= abs[Call(K,T) – Put(K,T)] ) as upfront payment. (ii) At expiration at time T we pay the forward price with the original long forward, whereas with the synthetic long forward we pay the strike price. Let F0,T denote the “no‐arbitrage” forward price. This means you have to pay $0 today and at ...
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...5 5A.1 a. The present value of any coupon bond is the present value of its coupon payments and face value. Match each cash flow with the appropriate spot rate. For the cash flow that occurs at the end of the first year, use the one-year spot rate. For the cash flow that occurs at the end of the second year, use the two-year spot rate. P = C1 / (1+r1) + (C2+F) / (1+r2)2 = $60 / (1.1) + ($60 + $1,000) / (1.11)2 = $54.55 + $860.32 = $914.87 The price of the bond is $914.87. b. The yield to the maturity is the discount rate, y, which sets the cash flows equal to the price of the bond. P = C1 / (1+y) + (C2+F) / (1+y)2 $914.87 = $60 / (1+y) + ($60 + $1,000) / (1+y)2 y = .1097 = 10.97% The yield to maturity is 10.97%. 5A.2 The present value of any coupon bond is the present value of its coupon payments and face value. Match each cash flow with the appropriate spot rate. P = C1 / (1+r1) + (C2+F) / (1+r2)2 = $50 / (1.10) + ($50 + $1,000) / (1.08)2 = $45.45 + $900.21 = $945.66 The price of the bond is $945.66. 5A.3 Apply the forward rate formula to calculate the one-year rate over the second year. (1+r1) ( (1+f2) = (1+r2)2 (1.09) ( (1+f2) = (1.10)2 f2 = .1101 The one-year forward rate over the second year is 11.01%. 5A.4 Calculate the forward rate over each year...
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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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...Main details about the Currency Hedge Case: * John will buy 8,000 cases for € 1,030,000 * John will sell all 8,000 cases for $199 for each case ($ 1,592,000) * Spot Exchange Rate is $1.32/ € * The Forward rate for November is $1.37/ € * The Forward rate for December is $1.39/ € * Forward contracts can be bank forward rate of the month * Future contract can be multiple of $ 62,500, expiring 3rd Friday of each month. * November option can be multiple of $62,500 buying the $ 1.37/€ costing 3 cents per Euro. * December option can be multiple of $62,500 buying the $ 1.39/€ costing 3 cents per Euro. * Euro Interest per three months in annual rate 6% * Dollar Interest per three months in annual rate 6.5% PART I FORWARD HEDGE € 1,030,000 ($ 1.37) = 1,411,100 November € 1,030,000 ($ 1.39) = 1,431,700 December Differences in the Forward rates for November Spot Ex Rate | Unhedget Position | Forward Hedge | Gain or losses | 1.22 | 1,256,600 | 1,411,100 | 154,500 | 1.32 | 1,359,600 | 1,411,100 | 51,500 | 1.37 | 1,411,100 | 1,411,100 | 0 | 1.42 | 1,462,600 | 1,411,100 | -51500 | 1.52 | 1,565,600 | 1,411,100 | -154,500 | Differences in the Forward rates for December Spot Ex Rate | Unhedget Position | Forward Hedge | Gain or losses | 1.24 | 1,277,200 | 1,431,700 | 154,500 | 1.34 | 1,380,200 | 1,431,700 | 51,500 | 1.39 | 1,431,700 | 1,431,700 | 0 | 1.44 | 1,483,200 | 1,431,700 | -51,500 | 1.55 | 1,586,200 | 1,431...
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...Olsen PowerPoint presentations and hand out sheets. | -Early Chinese History; Qing Dynasty-Mao Zedong’s reign (Great Leap Forward, Cultural Revolution etc..)-Deng Xiaoping reign (rebuilding China) | | | | Deng Xiaoping and the transformation of China – Ezra. F. Vogel (author) | -Deng Xiaoping reign (how it differed to Mao Zedong’s, economic zones, -Chinese socialism – against traditional Marxist beliefs. | | | | Access to History, The People’s Republic of China, 1949-1976 – Michael Lynch (author) | -Mao Zedong’s reign (Great Leap Forward, Cultural Revolution etc..)-Deng Xiaoping reign (rebuilding China) | | | | The Search for Modern China – Jonathan. D. Spence (author) | -Life in China before Mao Zedong and Deng Xiaoping-The Chinese Empire; Qing Dynasty | | | | A Bitter Revolution: China’s struggle with the modern world – Rana Mitter (author) | -China before the present day/before it became so powerful worldwide-Mao Zedong’s and Deng Xiaoping’s reignModern Day China | | | | China: From Empire to People’s Republic 1900-1949 – Michael Lynch (author) | -Mao’s communist victory/takeover.-Mao speeches/quotes. | | | | China: A History – Harlod Miles Tanner (author) | -Mao Zedong’s reign (Great Leap Forward, -Cultural Revolution etc..) | | | | Mao Zedong’s Dictatorship – Kathlyn Gay (author) | -Mao Zedong’s reign (Great Leap Forward, Cultural Revolution etc..) | | | | Mao’s China: A nation in...
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...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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...is 10 percent per annum with continuous compounding for all maturities. Jaime has just entered into a forward contract to buy 10,000 ounces of silver in six-months. a) What is the present value of the storage cost? b) What are the six-month forward price and the value of Jaime’s forward contract? c) Three months later the spot price of silver is 27.50 and the risk-free rate of interest is still 10 percent per annum with continuous compounding for all maturities. What is the value of Jaime’s forward contract? d) Explain why the forward price of silver can be calculated from its spot price and other observable variables whereas the forward price of copper cannot. a) The present value of the storage costs: b) ( ) ( ) The initial value of a forward contract is zero. c) The value of Jaime’s contract is d) Silver is an investment asset. If the forward price is too high, investors will find it profitable to hold more silver and short forward contracts. If the forward price is too low, investors will find it profitable to sell more silver and long forward contracts. Copper is a consumption asset. If forward price is too high, a strategy of buying copper and short forward contracts works. However, because investors generally hold copper for consumption, they are reluctant to sell it and buy forward contracts when forward price is too low. Because forward contracts cannot be used in manufacturing process or consumed in other ways. Problem 2 The Canadian...
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...Running Head: MARKETING Ryan Nguyen South University Final Project Week 3 Assignment 1 Introduction The present paper is in relation to the marketing of the health drinks in the market. In the present situation, the marketing manager of the organization has been told to be responsible for launching a new product called V Fusion + Energy. This is an energy drink. The organizational Vice President Beverage Marketing is of the opinion that, as various people look forward to have higher level of energy in them, the market is definitely the one which can be exploited by the organization as 2 out of 3 people wish that they had more energy. There are around 40% of the consumers who do not look forward to take the energy drinks due to the fact that, they believe that, energy drinks are not healthy for them. In relation to the present paper, various things regarding the marketing research shall be taken into consideration. Macro Environmental Factors The present organization is in the beverage industry. It is important for the organization to make sure that, it considers the macro environmental factors to the highest possible level (Burrow, 2011). Regarding the present situation, there are two major macro environmental factors which are required to be taken into account by the organization. The first factor is the competition in the market. There are various organizations in the market which are selling the health drinks to the...
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...Derivatives Lecture 10 Agenda Introduction Forwards Futures Swaps Options Derivative securities: Introduction Definition of derivative securities A derivative is a contract to buy or sell something in the future, namely the underlying. A derivate is also known as a ‘contingent claim’, because its value is contingent on characteristics of the underlying security. All contract details (such as the price, the quantity to be bought or sold, the maturity, etc.) are fixed at the time you enter the contract. The price of the derivative depends on the underlying. The underlying can be everything as long as it is clearly defined! Examples: Financial prices: stocks, bonds, stock-indices, exchange rates Commodities: oil price, gold, copper, coffee, orange juice concentrate, wine, energy In most cases the underlying is the price of a traded asset! 3 Derivative securities: Introduction Types of derivatives Forwards Futures Options Swaps Advanced products Structured products: combinations of forwards, swaps, and options Hybrid debt: straight debt with embedded derivative instruments Exotic options Real options … 4 Derivative securities: Introduction Derivatives markets Over-the-counter markets fl non-standardized products; tailor made contracts telephone or electronic trading relative high transaction cost relative high credit risk/default risk illiquidity standardized products trading...
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...becomes old? When they no longer maintain a regular job, or can’t be independent. What has been the best period of your life so far? High School Years. Do you (or did you) look forward to retiring? Yes because you don’t have to worry about getting up for work, losing your job, of having an income. What major changes have you had in your life? Switching from week day high school environment to real world outside of school and adapting to it. 1. What has been your favorite memory so far? Getting his first pay check and realizing he can make money by himself and be independent. 2. After you retire (if not yet) what are your plans? Hasn’t really thought about but take care of his family and go on vaca. To somewhere hes always wanted to. 3. What age do you think is good to stop having kids? 40 4. What was your first career choice(when you were younger)? A Dr. 5. What is one thing present in life you would want to change? His job, wishes he worked more and made more to feel comfortable. Person 2: Middle-Age Adult (Mom) How does middle age differ from other ages? Should be in a better financial situation, smarter about things, and establishing your career. When do you think a person becomes old? 70 What has been the best period of your life so far? The last 2 years Do you (or did you) look forward to retiring? Absolutely What major changes have you had in your life? A good relationship and financially sound. 1. What has been your favorite memory so far? The day her...
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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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...Possible Solutions The first possible solution would be to conduct the transaction without hedging, as with the previous order. The forecasted bid rate for September 5, 2006 is US 0.4234. If this forecast holds, the amount of the receivable would total $66,265. Since no Weighted Average Cost of Capital was given, we decided to use the effective rate on Baker Adhesives’ domestic line of credit as the discount rate. The annual percentage rate of the line of credit is 8.52%, and the effective 3 month rate comes to 2.1452%, factoring in compounding. After discounting to net present value for comparison purposes the receivable would total $64,874. The profit margin for this method, assuming the forecast to be correct, is 2.0%. This solution imposes a great amount of risk. The current year-to-date standard deviation of monthly exchange-rate changes is 6.53%, meaning that the actual amount that Baker Adhesives will receive could vary greatly. The break-even exchange rate, or the lowest rate at which the receivable would cover the total cost of the order, is US 0.4152. Since this break-even exchange rate falls within one standard deviation of the forecasted bid rate, it poses a threat that the company could realize a loss with the sale if the Brazilian Real depreciated below the break-even rate, however; there is also the potential that the company could obtain a higher profit margin if the Brazilian Real unexpectedly appreciated against the US dollar as opposed to depreciating. ...
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...this, various activities regarding marketing are also required to be taken into consideration. Some concern is also required to be given towards the financial section of the organization. The present paper shall consider all the above mentioned things so that, proper results are available with the organization. Whenever a new business is set up by an organization, it is necessary for it to make sure that a new business idea is developed. In this present situation, a business idea has been conceived by the organization. The business idea is to open up a consulting business for the existing Sikka Software customer’s today. In the consulting business we will coach large and small practices. This service will be provided as a “white glove” service that will retain customer’s and give them a plan to stay abreast many factors that have been revealed utilizing Sikka’s Practice Optimizer which monitors the dental practice 24/7. There are options available with the organization in relation to the business type selected. There are certain kinds of business types which can be selected by the organization in the present situation. The business types include new business, franchise or working with an already operating business. The Individual who is looking forward to set up the business needs to ensure that, he/she sets up an entirely new...
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