What is the value of its forgone revenue

Assignment Help Finance Basics

Reference no: EM13266234

Suppose that Pixar, the U.S. animation company, receives an order today for the delivery of 1 million DVDs of the movie "Frozen" to a wholesaler in Germany in exactly three months. The order contract stipulates that the wholesaler must make a payment of 10 million Euros to the company at the time of delivery. The company must then convert this entire payment into U.S. dollars to pay its employees and production costs. The company anticipates the Euro to depreciate relative to the dollar and considers hedging the foreign exchange risk through the use of a forward contract to sell Euros for dollars. Today's spot and 3-month forward exchange rates are given below:

Spot Price: 1 Euro = 1.382 US$

Forward Price: 1 Euro = 1.311 US$

a) Assuming that there are no transactions costs, how many dollars will Pixar receive in three months if it enters into the forward contract?

b) If Pixar does not hedge its risk and the exchange rate remains constant, how many dollars will it receive in three months?

c) Now, suppose that the Euro does in fact depreciate and that its spot price three months from today equals $1.298. If Pixar does not hedge, how much revenue does the company lose from the exchange rate fluctuation (compared to what they would have made without hedging if the exchange rate had remained constant)?

d) Assuming the spot rate equals $1.298 three months from today, would entering into the forward contract have been a good idea in this case? Explain your answer.

e) If after three months the Euro has appreciated by 5% and Pixar has a hedged position, what is the value of its forgone revenue (i.e. what are the company's lost profits)?

Reference no: EM13266234

Questions Cloud

What is the npv of accepting the system : What will be the annual net savings? Assume that the T-bill rate is 2.4 percent annually.

Convert the weigh to mass slugs using g : There is a damping coefficient of 18 lbs(ft./s). A weight of 96.6 pounds is attached to the spring, moved to 5 ft. above the equilibrium point and released with an initial velocity of 45 ft./s. Do not forget to convert the weigh to mass (slugs) us..

What amount must you donate to endow the scholarship : You want to endow a scholarship that will pay $5,000 per year forever, starting one year from now. If the school's endowment discount rate is 9%, what amount must you donate to endow the scholarship?

Find the potential drop from x2 to x1 in terms of p1 and p2 : Consider a 1-D semiconductor system when we have a perfect balence of drift and diffusion of holes. that is the total Jp=Jp, diffusion +Jp, drift = 0. P(x=x1)=p1, P(x=x2)=p2. find the potential drop from x2 to x1 in terms of p1 and p2

What is the value of its forgone revenue : Assuming the spot rate equals $1.298 three months from today, would entering into the forward contract have been a good idea in this case? Explain your answer.

Explain the conversion of methyl isonitrile to acetonitrile : For the conversion of methyl isonitrile to acetonitrile in the gas phase at 250 oC CH3NC CH3CN the following data have been obtained

Impact of technology and innovation on social change : Please use real-life and detailed examples to DISCUSS topic(s) related to the impact of technology and innovation on social change as it has progressed over the years and into today.

Explain the negative charge of the benzyl and anion : Use resonance forms to show the delocalization (over four carbon atoms) of the negative charge of the benzyl and anion

Find the stress in the wire due to the suspended mass : A 1.02 kg mass is suspended from a wire changes the length of the wire by 1.20 mm. find the stress in the wire due to the suspended mass

User Account

All Pages