Reference no: EM133073035

1. A U.S. exporting firm, exports to a French firm and will receive payment of 4,500,000 EUR in four months. On August 1, the spot rate was EUR/USD 1.1885, and the 4-month forward rate was quoted at 37 points. On August 1, the U.S. firm negotiated a forward contract with a bank to sell 4,500,000 EUR forward in four months. The spot rate on December 1 is EUR/USD 1.1941. The U.S. firm will receive ___ USD for the EUR.

A. 5,331,600

B. None of the other options are correct

C. 5,364,900

D. 5,348,250

E. 5,373,450

2. A financial institution has brought together two firms who see access to new debt capital for expansions of their operations.

Company EEE is concerned about rising interest rates and seeks fixed rate financing, while company FFF is prepared to take what it believes to be the attractive current variable rate which is on offer.

The two firms have existing arrangements in place for sources of financing, however EEE can attract funds from the Eurodollar market at what it believes to be beneficial rates.

EEE: Fixed: 6%

EEE: Floating: LIBOR+2.5%

FFF: Fixed: 8%

FFF: Floating: LIBOR+5.5%

(a) Assuming no transaction costs, clearly indicate the size of any observed mispricing of risk

(b) Clearly indicate any absolute advantage in financing. Why is this likely to be the case?

(c) Clearly indicate any comparative advantages in financing.

(d) The financial institution helps to create a swap which is beneficial to both parties and requires a net total compensation package of 0.2% of the total funds involved (this does not mean 0.2% from each company, this means 0.2% total compensation). Assume that any available benefits are split evenly between the two companies and design a swap which is acceptable to both companies and to the financial institution. Clearly indicate the swap rate that the two companies and the financial institution are using. Clearly indicate the final borrowing rate for each company.

3. Given the following information on a U.S. exchange:

Today's Spot: EUR/USD 1.19

EUR/USD monthly Deliverable Call options

Time to expiry: 1 month

Contract size 125,000 Euro

Strike 1.1900

Option Premium 0.89c US

Is this option currently?

A. At the money

B. Out of the money

C. Cannot be determined from the above information

D. In the money

4. Pick one statement that is true:

A. translation exposure is unaffected by the accounting methodology applied by the multinational corporation.

B. the optimal hedge of a transaction exposure is a money-market hedge as it retains the possibility of favorable movements in the spot market while minimizing risk.

C. a subsidiary who does not remit earnings back to the parent company does not help to avoid translation exposure.

D. An Australian exporter to the U.S. who is paid in AUD and has competition from producers located in the U.S. does not face economic exposure.

E. translation exposure impacts only the cash flows of an organization.

5. Over the last two years the AUD/USD exchange rate has decreased by 8.8%. over this time Australia has seen total inflation of 3.6% while the U.S. has recorded inflation of 4.2%. which statement is correct when compared to the USD?

A. the Australian dollar has fallen in real terms and fallen in nominal terms

B. the Australian dollar has risen in real terms and risen in nominal terms

C. the Australian dollar has fallen in real terms and risen in nominal terms

D. the Australian dollar has risen in real terms and fallen in nominal terms

E. None of the other options are correct