Reference no: EM132973380

Questions -

Q1. A company operating in Japan must pay 6 million euros for products that will be received in France within one month. The current exchange rate is JPY 128,5/EUR.

a) Which type of risk is this company facing in this case?

b) Why cash balances in foreign currencies do not systematically result in exposure to currency risk?

Q2. Norah Inc. has just paid an annual dividend of €0.99. Analysts forecast an 11.5% per year increase in company profits over the next five years. Beyond that, Norah Inc.'s profits are expected to grow at the industry average rate of 5.6% per year.

a) If Norah Inc.'s cost of equity is 9.2% per year and its dividend payout ratio remains constant, at what price should Norah Inc.'s shares be sold using the dividend discount model?

b) What is the most relevant / direct discount rate to use in determining the price of the company's shares?

Q3. In May 2020, the American company Berrings placed an order with the Italian company Maschetti for an amount of €500,000 and during the same period, it acquired a forward contract for the purchase of €500,000 at a forward rate of $1.29/€ in May 2021.

a) If in May 2021, the exchange rate is $1.45/€, how much would Bertolli company have to pay in dollars in May 2021?

b) Assuming that there are no transaction costs (i.e., hedging is "free"), what is the expected impact of the currency risk hedging on the cash flows of this company (in terms of variability and value)?

Q4. The Grand Est Mobility company requires all of its van drivers to take a road safety course every year. What risk management technique is illustrated by this example?

Q5. Assume Pluvio Systems does not pay dividends but has spent 5 billion euros on share repurchases last year. If Pluvio Systems' cost of equity is 12%, the amount spent on buybacks is expected to grow by 8% per year and Pluvio Systems has 6 billion shares outstanding, then what is the price per share of this company?

Q6. Assume your company needs to borrow €10,000,000 in three months that you will be able to pay back nine months later. In order to hedge against a rise in interest rates in three months, the company enters into an (3×12) FRA with a bank at 4% FRA rate, with a notional principal of €10,000,000.

a) If in 3 months, the interest rate drops to 3%, who will pay the compensation?

b) What will be the amount paid for this compensation?

Q7. Suppose your company needs €10,000,000 in three months that you will be able to pay back nine months later. In order to hedge against a rise in interest rates in three months, the company enters into an (3´12) FRA with a bank at 4% FRA rate, with a notional principal of €10,000,000.

a) If in 3 months, the interest rate drops to 3%, who will pay the compensation?

b) What will be the amount paid for this compensation?

Q8. The current exchange rate is $1.10/€. The 1-year forward is $1.15/€. The interest rate in Europe is 2%. The interest rate in the USA is 5%.

a) Is this possible? What is the underlying concept of this question?

b) Why might this company prefer to hedge this risk with options rather than forward contracts?

c) Consider a 10-year fixed bond with 10% annual coupons. The duration is 8.76 years and the face value is €300. Suppose the yield decreases from 10% to 9.75%. According to the duration/sensitivity approach, by how much will the value of the bond change (euros increase or euros decrease)?

Q9. A bank has mortgage loans with a current market value of 325 million euros. The duration of this mortgage loan portfolio is 15.9 years. This bank finances its mortgages by issuing CDs and the current value of these debts is 275 million euros. The duration of these commitments is 4.6 years.

a) What is the initial duration of equity of this bank?

b) Explain how this bank can hedge an interest rate risk by restructuring its balance sheet?

Q10. As the director of a US company, assume the exchange rate is 120 JPY to 1 USD. Every time you receive an order, instead of shipping it from your production facility, you would go to a Japanese company and receive invoice payment directly.

a) If the invoice received is 7,500 JPY and you can collect 62 USD per item sold to your customer, what would be your loss per item if you were to pay 7,500 JPY to the Japanese company?

b) Why should you conduct a careful analysis of the currency risk here and consider more careful risk management?

a) What is the value of Expert Inc. using the DCF method?

b) What are the most relevant cash flows when you value your business using the DCF method?

a) What is the market capitalization of Redrid?

b) If you decided to evaluate the value of Redrid using the multiples method, what are the implicit assumptions of this method?