Describe nature of your transaction foreign exchange risk

Assignment Help Finance Basics

Reference no: EM13897863

1. You are a sales manager for Motorola and export cellular phones from the United States to other countries. You have just signed a deal to ship phones to a British distributor, and you will receive £700,000 when the phones arrive in London in 180 days. Assume that you can borrow and lend at 7% p.a. in U.S. dollars and at 10% p.a. in British pounds. Both interest rate quotes are for a 360-day year. The spot rate is $1.4945 >£, and the 180-day forward rate is $1.4802 >£.

a. Describe the nature and extent of your transaction foreign exchange risk.

b. Describe two ways of eliminating the transaction foreign exchange risk.

c. Which of the alternatives in part b is superior?

d. Assume that the dollar interest rate and the exchange rates are correct. Determine what sterling interest rate would make your firm indifferent between the two alternative hedges.

2. Suppose that there is a 0.5% probability that the government of Argentina will nationalize its banking system and freeze all foreign deposits indefinitely during the next year. If the dollar deposit interest rate in the United States is 5%, what dollar interest would Argentine banks have to offer in order to attract deposits from foreign investors?

Reference no: EM13897863

Questions Cloud

Examples of roman engineering : This posting utilizes three examples of Roman engineering to provide the following information:

Greek work of art and one roman work : This posting chooses one Greek work of art and one Roman work of art and compares and contrasts them according to the criteria listed:

Explain two ways to hedge the risk : Describe the nature and extent of your transaction foreign exchange risk. Explain two ways to hedge the risk. Which of the alternatives in part b is superior?

Find the magnitude and direction of the electric field : Find the magnitude and direction of the electric field produced by a red blood cell at the following locations. Assume that red blood cells can be modeled as spheres of 6.54 um diameter with -2.55*10^-12 C excess charge uniformly distributed over ..

Describe nature of your transaction foreign exchange risk : Describe the nature and extent of your transaction foreign exchange risk. Describe two ways of eliminating the transaction foreign exchange risk.

How much heat must have gone into the environment : If 250 moles of gas are compressed to 0.75 of an original volume at a constant temperature or 295 K, how much heat must have gone into the environment?

Describe one scene that especially brings out the issue : The Stranger by Albert Camus

What is the spot interest rate in percentage per annum : If the market price of a 20-year pure discount bond with a face value of $1,000 is $214.55, what is the spot interest rate for the 20-year maturity expressed in percentage per annum?

What acceleration is experienced by people remaining at rim : A space station shaped like a giant wheel has a radius of 114m and, when empty, a moment of inertia of 5.84E+8kgm^2. A crew of 163 are living on the rim, and the station's rotation causes the crew to experience an acceleration of 1.00g. 0 When 134..

User Account

All Pages