Does any currency exchange rate risk exist

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Reference no: EM131148255

Problem 1 - One area in which you are assisting is in the setup of business development in Central and South America for Navigation Systems, Inc. (NSI). The firm has negotiated the framework of supplying $40 million per year (in U.S. dollars) in navigations systems for Auxiliary Aircraft in Brazil for 10 years. If the products are manufactured in the United States and delivered to Brazil, then there will be a 5% import tariff on $40 million in product. As an alternative, the Brazilian government has offered to pay for all costs associated with building and locating a manufacturing plant in Brazil to build the product. Auxiliary Aircraft would pay an additional 15%, making annual sales $46 million (in U.S. dollars), and no tariff would be levied.

Answer the following questions about this situation:

Does any currency exchange rate risk exist? Why?

What is a tariff? How is it implemented and collected?

Also respond to the vice president of business development's request for the following:

the total amount of money NSI would receive from each scenario? 

a report on what effect the Free Trade Agreement of the Americas (FTAA) or the possible regional integration, like Mercosur, would have on each scenario? 

your thoughts about any other factors that would affect either scenario? 


Problem 2- Navigation Systems Inc. now has total worldwide revenues of over $500 million forecast for this coming year. You have operations in the United States of $300 million with a 10% ROS (return on sales, which is the same as net income on an income statement); operations in Germany of €100 million with an ROS of 12%; and operations in Shanghai, China of 650 million Yuan with an ROS of 8%. You expect to repatriate all the ROS to the United States when available in 12 months.

At your supervisor's request, do the following:

Determine the spot and 12-month forward exchange rates, and determine any change in the ROS repatriated in 12 months based on exchange rates versus the current forecast.

Describe the repatriation using each of the following:
a spot transaction

an outright forward

a foreign-exchange swap

Would there be any use or benefit in using a currency option or currency swaption? Describe each.

Be sure to consider any U.S. corporate taxes that may be due and also whether there are any tax holidays in effect that may alter the taxes due on repatriation of the profits.

How would you advise the company to handle the repatriation?

Reference no: EM131148255

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