Answers to Extra Problems
Currency Amount / Exchange Rate / US $ Equivalent$.63 / $.63
€.41 / $1.55/€ / $.6355
£0903 / £,5/$ / $.1806
¥18.4 / ¥105/$ / $.1752
$1.6213
$1.6213/SDR x ¥105/$ = ¥170.24
2. ($1.50/€)/ ($2/£) = £.75/€. Arbitrage is not possible and hence you could not make any money.
3. (X-$1.8/£)/($1.8/£) =.4
X=$2.52/£
4. Forward Market Speculation → Sell £’s at the 3 month forward rate and then buy £’s at the spot rate in 3 months.
We can get slightly different answers on the amount of the profit depending on what assumptions we make. If we assume that we are willing to spend $1000 to buy pounds in the future for $1.99 (we hope) then we would buy $1000/($1.99/£) = £502.51 and then we would sell these £’s for $1030.15 and thus making $30.15.
Spot Market Speculation → Sell £’s or buy $’s at the rate of $2.00/£ and hope to buy £’s for $1.99. So with £1000 (equivalent of $2000) I would buy $2000 and then sell these $2000 for ($2000)/($1.99/£) = £1005.025 making £5.025 or $10.
Or with a £1000 I will make $.01 on each £ and thus make £1000($.01/£) = $10.
5. I would not exercise a put on euros. The spot rate on the expiration date is greater than the exercise price. I would rather sell a € for $1.50 than for $1.45.
Breakeven exchange rate $1.45/€ - $.10/€ = $1.35/€
Chapter 4
1. (1.06)5 -1 = .338 and (1.09)5 -1 = .539
(.7 –x)/x = (.338-.539)/1.539
X= €.805/$
2. Investing in the US $1000 (1+ .0125) = $1012.50
Investing in Canada $1000 (C$1.05/$) (1.01)/(C$1.045/$) = $1014.83
CIA = $1014.83-$1012.5 = $2.33
Chapter 8
1. Forward market hedge €200 million /(€.61/$) = $327,868,853.
MM hedge €200 million/(1.03) = €194,174,757
€194,174,757/(€.6/$) = $323,624,596.
$323,624,596 (1.02) = $330,097,087.
Put value of premium: €200 million (.025) = €5 million or €5 million/(€.6/$) = $8,333,333
Future value of premium $8,333,333 (1.02) = $8,500,000
Minimum proceeds:
€200 million /(€.605/$) = $330,578,512. -$8,500,000 = $322,078,512.4
Breakeven exchange rate: $327,868,853 = €200 million/x - $8,500,000
X= €.5946/$
Chapter 9
1. Sales
US $20 mil
Europe $33.33 mil
Total $53.33 mil
Costs
US $30 mil
Europe $15 mil
Dep $4
Total $49
EBT $4.33 mil
Taxes $1.732 mil
EAT $2.598 mil
CFlow $6.598 mil ($2.598 + $4)
Chapter 10
Current Rate Method
Accounts / $ Value Before / $ Value After / ChangeCash / 90.91 / 83.33 / -7.58
Accounts Receivable / 36.36 / 33.33 / -3.03
Inventories / 54.55 / 50 / -4.55
Net Plant and Equipment / 90.91 / 83.33 / -7.58
272.73 / 249.99 / -22.74
Accounts Payable / 54.55 / 50 / 4.55
Long-term Debt / 72.73 / 66.67 / 6.06
Capital Stock / 80 / 80 / 0
Retained Earnings / 40 / 40 / 0
CTA / 25.45 / 13.32 / Total -12.13
($Exposed Assets -$Exposed Liabilities) (% change in Exchange Rate)
($272.73-$127.28) (.55-.6)/.6
($145.45) (-.0833) = -$12.12 Translation Loss
Temporal Method
Accounts / $ Value Before / $ Value After / ChangeCash / 90.91 / 83.33 / -7.58
Accounts Receivable / 36.36 / 33.33 / -3.03
Inventories / 60 / 60 / 0
Net Plant and Equipment / 90.91 / 90.91 / 0
278.18 / 267.57 / -10.61
Accounts Payable / 54.55 / 50 / 4.55
Long-term Debt / 72.73 / 66.67 / 6.06
Capital Stock / 80 / 80 / 0
Retained Earnings / 70.9 / 70.9 / 0
Total 0
($Exposed Assets -$Exposed Liabilities) (% change in Exchange Rate)
($127.27-$127.28) (.55-.6)/.6
($-.01) (-.0833) = 0 (No gain or loss)
Chapter 22
1. A +9 (23-14) B -2 (17-19), C -7 (16-23) , D 0 (17-17)
B should pay 2 and C should pay A 7.