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
Words: 8865 - Pages: 36
INTERNATIONAL FINANCE ASSIGNMENT 2 _ Answer Key PROBLEM I (30 points) Suppose the quarterly (90-day) interest rate in the US is 2.5% and it is 4% in Canada. If the $/CD spot exchange rate is $0.80/CD and the 90-day forward exchange rate between US and Canadian dollars is $0.79/CD , does the interest rate parity (IRP) hold? Why or why not? If it does not hold, what is the direction of the capital flow? 1.025 0.79 1.04 0.80 0.9856 ≠ 0.9875 IRP does not hold. 2.5< (4-1.25=2.75) Therefore, funds flow
Words: 779 - Pages: 4
pulp-futures contract will also decrease. Kraken Group will be paying less for its anticipated specialty paper purchases. Some of the inventory cost savings from the price decline is balanced by the loss on commodity futures contracts. 3. By having a forward contract for ink with a supplier, Kraken can lock in its inventory purchase. On a bright sight for Kraken, the supplier may agree to a price that is under the actual future price of ink. In this case, Kraken will benefit because it will the supplier
Words: 797 - Pages: 4
percent are made in Germany. As the Tolar strengthens against other currencies, those countries will seek electricity meters from more cost effective sources. Short-term solutions * IskraEMECO should invest in forward contracts with the German Mark to lock in the exchange rate. The forward contract will act as a hedge against any price negative price movements in the German Mark against the Tolar. Long-term solutions * Initiate a share buy-back program where the firm’s management looks to gain
Words: 302 - Pages: 2
Problem 3 Now I will explain why the NPVs of these two approaches are different. For Approach A, NPV is calculated using cash flows denoted in Peso and interest rate in Mexico and then transferred into Euro at the lowest exchange rate in 2008, which is 15.99 MXN/EUR. This is equivalent to using a constant exchange rate of 15.99 to transfer Peso into Euro every year. On the other hand, for approach B, cash flows are transferred into Euro every year and NPV is calculated using cash flows denoted
Words: 475 - Pages: 2
Group Name: | Jasen Turnbull | Section: | Sect 300 (2:30-3:45pm, Mon. & Wed.) | Date: | October 26th, 2010 | 1) There are several factors that give rise to currency exposure at AIFS. One of these is the fact that most of their revenues are denominated in USD ($) but most of the expenses they incur are in foreign currencies (mainly Euros and British Pounds). One of the reasons AIFS hedges currency is to protect themselves from changing foreign exchange rates. This also protects them
Words: 745 - Pages: 3
Corporate Finance & Asset Markets M1 – Finance & Economics Track Solutions to Assignment 5: Section 8 - Interest Rates and Bonds Solutions to Part A: Practice Problems 1. When you are paying out money, you prefer not to pay interest on interest. Thus, you would prefer a low compounding frequency, which is monthly. 2. If the term structure is flat and a 2-year bond with a face value of $1,000 and a 3.5% annual coupon (paid semi-annually) is selling at par, this means that the annual discount rate
Words: 712 - Pages: 3
aC s ou o u rc rs e eH w e r as o. co m 1. The dollar amount it can receive in six months is S1 €1, 250,000 , where S1 is the spot rate in December. 2. If Plains State chooses to hedge its transaction exposure in the forward market at the available forward rate, its dollar payoff in six months will be 1, 250,000 0.8750 $1,093,750 3. Option Premium €1,250,000 1.5% 0.8924 $16,732.5 11% FV6months (Option Premium) = $16,732.5 (1 ) $17,652.79 2 Min = 0.9 1,250,000
Words: 832 - Pages: 4
(FMB 616E) Sep. 10, 2015 Due by Sep. 17 a. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Solution: If you believe the spot exchange rate will be $1.92/£ in three months, you should buy £1,000,000 forward for $1.90/£. The profit will be: £1,000,000 x ($1.92 -$1.90)=$20,000. b. What would be your speculative profit in dollar terms if the spot exchange
Words: 1068 - Pages: 5
内容摘要 金融衍生工具作为金融创新最为核心的部分，从其诞生开始到现在，经历了一个迅速发展的过程，已被越来越多的企业所使用。金融衍生工具的出现是为了规避风险，除此之外，金融衍生工具也在降低筹资成本、优化融资结构、提高企业价值等方面做出了巨大贡献，也正因为如此，金融衍生工具能够在如此短的时间内有如此迅猛的发展。一方面，国际金融市场因金融衍生工具的发展而变的异彩纷呈，另一方面，我们也感受到了金融衍生工具因其自身的高杠杆性、高复杂性等特点给金融市场所带来的巨大风险。 本文主要对金融衍生工具的内涵、发展等基础背景知识进行了介绍，分析金融衍生工具在金融危机中的作用以及传导机制；介绍了金融衍生工具的发展给我国经济造成的影响；并就后危机时代金融衍生工具的发展提出建议。 关键词：后危机时代；金融衍生工具； 金融创新 Abstract Financial derivatives as the most central part of the financial innovation, from its birth to
Words: 1291 - Pages: 6
