Reference no: EM132976933

Questions -

Q1. Assume that Kramer Co. will receive SF100,000 in 30 days. Today's spot rate of the Swiss franc is $.64, and the 90-day forward rate is $.645. Kramer has developed the following probability distribution for the spot rate in 30 days. The possible spot rate is $0.62, $0.63. $0.64 and $0.65 with the probability 30%, 10%, 40, and 20%.

a. How many dollars will Kramer receive if it uses the forward hedge?

b. How many dollars will Kramer expected if it does not hedge?

c. In the previous question of Kramer Co., Kramer will not hedge its receivable with the forward contract. (True or False)?

Q2. Assume that Parker Co will receive SF500,000 in 90 days. The 360 day borrowing and deposit rate in the U.S is 7% and 6%, respectively. The 360 day borrowing and deposit rate in Switzerland is 5% and 4%, respectively. Assume the forward rate of the Swiss rate of the Swiss franc is $0.05 and the spot rat of the Swiss franc is $0.48. If Parker Co. uses a money market hedge.

a. How many SF does it borrow now?

b. How many dollars can Park receive when it converts borrowed SF to dollar now?

c. How many dollars will Park receive in 90 days if it uses money market hedge?

d. How many dollars will Park receive in 90 days if it uses the forward hedge?

d. In the previous question of Parker Co., the forward hedge is better than the money market hedge (True or False)?

Q3. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 60 days. Today's spot rate of NZ$ is $0.52. A put option on NZ$ exists with an exercise price of $0.54, a premium of $0.02, and a 60-day expiration date. The forecasted spot rate of the NZ$ in 60 days is $0.50 with a probability of 20%, $0.53 with a probability of 40% and $0.55 with probability of 40%.

a. What is the estimated dollar cash inflows of Patton if it uses the put option hedge?

b. What is the estimated dollar cash inflows of Patton if it does not hedge?

c. In the previous of Patton Co., Patton will use the put option to hedge its receivables. (True or False)

Q4. The 360-day borrowing and deposit rate in the U.S. is 7% and 4%, respectively. The 360-day borrowing and deposit rate in Jordan is 5% and 2%, respectively. Pablo Corp. will need 200,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.60, the 360-day forward rate is $1.58, and the spot rate is 360 days will be $1.61.

a. If Pablo decides to implement a money market hedge, how many JOD does Pablo need now?

b.. If it decides to implement a money market, how many dollars will it need to pay back in 360days?

c. If it decides not to hedge, how many dollars will it need to pay back in 360 days?

d. In the previous question of Pablo CO., it is better for Pablo not use the money market hedge (True or False)

Q5. You are the treasurer of Montana Corp. and must decide how to hedge (if at all) future payables of 2 million Japanese yen 60 days from now. Call options are available with a premium of $.0002 per unit and an exercise price of $.01054 per Japanese yen. The forecasted spot rate of the Japanese yen in 60 days is $0.01051 with probability 20%, $0.01053 with probability 30%, $0.01055 with probability 25%, and $0.01056 with probability 25%.

a. What is the estimated dollar cash outflows of currency call hedge? (Please fill the blank with the number before %?

b. What are the estimated dollar cash outflows if you decide not to hedge Montana payables?

c. In the previous question of Montana Corp., Montana will use the call option to hedge its payables (True or False)

Q6. Lorre Co. needs 200,000 Canadian dollars (C$) in 10 days and is trying to determine whether or not to hedge this position. Lorre estimates the value of C$ will be $0.565 with a probability of 15%, $0.569 with a probability of 25%. The 90 day forward rate of the Canadian dollar is $0.572, and the current spot rate of the Canadian dollar is $0.568. If Lorre implement a forward hedge.

a. What is the probability that hedging will be less costly to the firm than not hedging?

b. In the previous questions of Lorre Co. Lorre will choose to implement to forward hedge. (True or False)