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Navarro’s Intra-Company Hedging. Navarro was a US based multinational company that manufactured and distributed specialty materials for soundproofing construction. It had recently established a new European subsidiary in Barcelona, Spain and was now in the process of establishing operating rules for transactions between the US parent company and the Barcelona subsidiary. Ignacio Lopez was International Treasurer for Navarro, and was leading the effort at establishing commercial policies for the new subsidiary. Navarro’s first shipment of product to Spain was upcoming. The first shipment would carry an intra-company invoice amount of $500,000. The company was now trying to decide whether to invoice the Spanish subsidiary in US dollars or European euros, and in turn, whether the resulting transaction exposure should be hedged. Ignacio’s idea was to take a recent historical period of exchange rate quotes and movements and simulate the invoicing and hedging alternatives available to Navarro to try to characterize the choices. Ignacio looked at the 90 day period that had ended the previous Friday (standard intra-company payment terms for transcontinental transactions was 90 days). The quarter had opened with a spot rate of $1.0640/Euro, with the 90 day forward rate quoted at $1.0615/Euro the same day. The quarter had closed with a spot rate of $1.0980/Euro.
Which unit would have suffered the gain (loss) on currency exchange if intra-company sales were invoiced in US dollars ($) assuming both completely unhedged and fully hedged?
Which unit would have suffered the gain (loss) on currency exchange if intracompany sales were invoiced in euros assuming both completely unhedged and fully hedged?
Which of the following statements about internal rate of return is true?
Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000(80%) of the foundation’s investment portfolio in derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. Dete..
Contrast sources and uses of cash referencing using at least two examples of assets and liabilities (four total). Provide examples of how cash is used or provided depending on whether it is categorized as an asset or liability.
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Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain
A bond that matures in 12 years has a 9% semiannual coupon and a face value of $1,000. The bond has a nominal yield to maturity of 8%. What is the price of the bond today?
In recent years Sweep Programs have grown throughout the U.S. With this financial innovation, banks automatically sweep excess funds from their customers’ checkable deposits into interest bearing MMDAs, which are part of savings and time deposits.
If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume tha..
Nancy, an investor in ErenCo, decides to buy a put option on ErenCo stock with a strike price (exercise price) of $9 which expires on the third Friday of May, 2016. What would she have to pay in today’s market for this option? In general, what determ..
You own 2,200 shares of stock in Avondale Corporation. You will receive a $1.60 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $60 per share. The required return on Avondale stock is 20 percent. Suppose you ..
Financial managers broaden their definition of cash to inclulde:
Utopia is considering two forms of this tax credit, one that is fully refundable and one in which the tax credit is limited to the amount of taxes the family pays.- Which form of the tax credit is more progressive?
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