Hedge the euro foreign exchange rate risk

Assignment Help Financial Management
Reference no: EM131983863

You are the CFO of a manufacturing company in the United States. Your company expects to receive €10 million Euro from a European customer in six months from now. The current exchange rate between US dollar and Euro is 1.13 USD/EUR. However, you are afraid that the Euro currency may depreciate against the US dollars in the next six months. You may use the Euro currency forward contract to hedge the exchange rate risk. Assume the 6-month Euro currency forward exchange rate is 1.12 USD/EUR.

(1) Should you buy or sell the Euro currency forward contract to hedge the Euro foreign exchange rate risk?

(2) Suppose the company took your suggestion and hedged the Euro currency exchange risk by using the forward contract. The exchange rate between Euro and US dollar turns out to be 1.18USD/EUR at the end of the six months. Calculate how much U.S. dollar your company will receive by converting the €10 million Euro. Also calculate the gain or loss on the forward contract.

(3) What if the exchange rate between Euro and US dollar turns out to be 1.10 USD/EUR at the end of the six months? How much U.S. dollar will your company receive by converting the €10 million Euro? How much is the gain or loss on the forward contract?

(4) Draw the payoff diagram for your company's position in the forward contract.

Reference no: EM131983863

Questions Cloud

MACRS schedule-What is the NPV of the project : Assume the company has other profitable projects. MACRS schedule. What is the NPV of the project?
Arbitrage-free price of three-month forward contract : Calculate the arbitrage-free price of (i) a three-month forward contract on the stock and (i) a six-month forward contract on the stock.
Evaluating two different silicon wafer milling machines : You are evaluating two different silicon wafer milling machines. compute the EAC for both machines.
How might expectations of higher oil prices : How might expectations of higher oil prices affect the demand for loanable funds, and interest rates in the United States?
Hedge the euro foreign exchange rate risk : Should you buy or sell the Euro currency forward contract to hedge the Euro foreign exchange rate risk?
Calculate npv of the project : The real discount rate is 8 percent. The corporate tax rate is 34 percent. Calculate the NPV of the project.
What is the percentage return on the position : If the futures price of gold rises to $255, what is the percentage return on the position?
Compute yield to maturity for bond : Compute yield to maturity for a bond ($1,000 face value) with an 8% coupon that pays semiannual interest, maturing in 15 years priced at $840
What is the value at year eight of perpetual stream : Given an interest rate of 6.65 percent per year, what is the value at Year 8 of a perpetual stream of $3,400 payments that begin at Year 18?

Reviews

Write a Review

Financial Management Questions & Answers

  Should the trader take long or short position in the asset

A call option on an asset has a delta of 0.3. A trader has sold 3,000 options and wants to create a delta-neutral position. Should the trader take a long or short position in the asset? How many units of the asset should be bought or sold?

  Semi annually to cover estimated trade-in difference

Antonio plans to buy a new car three years from now. Rather than borrow at that time, he plans to invest part of a small inheritance at 7.5% compounded semi annually to cover the estimated $6000 trade-in difference. How much does he need to invest if..

  Use the payback decision rule to evaluate project

Use the payback decision rule to evaluate this project. Payback years Should it be accepted or rejected?

  Expected two-year interest rate three years

Consider the following $1,000 par value zero-coupon bonds: The expected two-year interest rate three years from now should be __________

  Evaluate the fixed overhead volume variance

calculate the Variable overhead efficiency variance and fixed overhead volume variance and overhead spending variance

  Calculate your portfolios new beta

Your retirement fund consists of a $7,500 investment in each of 20 different common stocks. Calculate your portfolio's new beta.

  Company has long-term debt ratio

The Smathers Company has a long-term debt ratio (i.e., the ratio of long-term debt to long-term debt plus equity) of .50 and a current ratio of 1.39.

  What would happen to the confidence index

Suppose Baa-rated bonds currently yield 7.9%, while Aa-rated bonds yield 5.9%. Now suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1.2%. What would happen to the confidence index?

  What is the project year one cash flow

Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

  What is the current bond price

Lycan, Inc., has 6 percent coupon bonds on the market that have 7 years left to maturity. The bonds make annual payments. Required: If the YTM on these bonds is 8 percent, what is the current bond price?

  What was flotation cost as percentage of funds raised

The Wiley Oakley Co. has just gone public. Under a firm commitment agreement, the company received $21.65 for each of the 6.65 million shares sold. The initial offering price was $23.50 per share, and the stock rose to $30.01 per share in the first f..

  Short-term assets and short-term debt-paying ability

Prepare an evaluation that compares the financial performance of two companies of your choice Part 1: Liquidity Ratios Review the ratios related to the liquidity of short-term assets and short-term debt-paying ability. Select which liquidity ratios w..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd