Payables in foreigncurrencies to insulate

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Reference no: EM131039912

Homework
1. ($.81 - $.7938)/$.81 = .02 or 2%
2. [($.11 - $.10)/$.11]= .091, or 9.1%.
3. The forward contract can hedge future receivables or payables in foreigncurrencies to insulate the firm against exchange rate risk. Yet, in this case, the KholCorporation should not hedge because it would benefit from appreciation of the pound whenit converts the pounds to dollars.
4. 1/1.25 = .8 Euros
5. $.17/$.008 = 21.25
1 zloty = 21.25 yen

a)
1. Borrow Mexican Peso 70 million
2.Convert the Mexican Peso 70 million to dollars: Mexican Peso 70, 000,000 $.15 = $10,500,000
3. Lend the dollars through the interbank market at 8.0% annualized over a 10-day period. The amount accumulated in 10 days is: $10,500,000 [1 + (8% 10/360)] = $10,500,000[1.002222] =$10,523,333
4. Repay the peso loan. The repayment amount on the peso loan is: Mexican Peso 70,000,000 [1 + (8.7%10/360)] = 70,000,000 [1.002417]=Mexican Peso 70,169,167
5. Based on the expected spot rate of $.14, the amount of dollars needed to repay the peso loan is: Mexican Peso 70,169,167 $.14 = $9,823,683
6. After repaying the loan, Blue Demon Bank will have a speculative profit (if its forecasted exchange rate is accurate) of:$10,523,333 $9,823,683 = $699,650

b)
1. Borrow $10 million
2. Convert the $10 million to pesos (Mexican Peso): $10,000,000/$.15 = Mexican Peso 66,666,667
3. Lend the pesos through the interbank market at 8.5% annualized over a 30-day period. The amount accumulated in 30 days is: Mexican Peso 66,666,667 × [1 + (8.5% × 30/360)] = 66,666,667 × [1.007083] = Mexican Peso 67,138,889
4. Repay the dollar loan. The repayment amount on the dollar loan is: $10,000,000 × [1 + (8.3% × 30/360)] = $10,000,000 × [1.006917] = $10,069,170 42 International Financial Management
5. Convert the pesos to dollars to repay the loan. The amount of dollars to be received in 30 days(based on the expected spot rate of $.17) is: Mexican Peso 67,138,889 × $.17 = $11,413,611
6. The profits are determined by estimating the dollars available after repaying the loan: $11,413,611 - $10,069,170 = $1,344,441
Answer 7.

Borrow S$10,000,000 and convert to U.S. $: S$10,000,000 $.43 =$4,300,000. Invest funds for 60 days. The rate earned in the U.S. for 60 days is:7%(60/360) = 1.17%. Total amount accumulated in 60 days: $4,300,000 (1 + .0117) =$4,350,310.Convert U.S. $ back to S$ in 60 days: $4,350,310/$.42 = S$10,357,881. The rate to be paid on loan is: .24 (60/360) = .04. Amount owed on S$ loan is: S$10,000,000(1 + .04) = S$10,400,000. This strategy results in a loss: S$10,357,881 S$10,400,000 =S$42,119. Citizens Bank should not pursue this strategy.

Reference no: EM131039912

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