Yankee inc a us based mnc has recently decided to expand

Assignment Help Finance Basics
Reference no: EM13482863

Yankee, Inc., a U.S. based MNC, has recently decided to expand its international trade relationship by exporting to France. Bonjour Ltd., a French retailer, has committed itself to the annual purchase of 300,000 pairs of "Speedos," Yankee's primary product, for a price of EUR120 per pair. The agreement is to last for two years, at which time it may be renewed by Yankee and Bonjour.

In addition to this new international trade relationship, Yankee continues to export to Malaysia. Its primary customer there, a retailer called Leisure Products, is committed to the purchase of 270,000 pairs of Speedos annually for another two years at a fixed price of MYR450 per pair.

When the agreement terminates, it may be renewed by Yankee and Leisure Products. Yankee also incurs costs of goods sold denominated in MYR. It imports materials sufficient to manufacture 108,000 pairs of Speedos annually from Malaysia. These imports are denominated in MYR, and the price depends on current market prices for the components imported.

Under the two export arrangements, Yankee sells quarterly amounts of 75,000 and 67,500 pairs of Speedos to Bonjour and Leisure Products, respectively. Payment for these sales is made on the first of January, April, July, and October. The annual amounts are spread over quarters in order to avoid excessive inventories for the French and Malaysian retailers. Similarly, in order to avoid excessive inventories, Yankee usually imports materials sufficient to manufacture 27,000 pairs of Speedos quarterly from Malaysia. Although payment terms call for payment within two months of delivery, Yankee generally pays for its Malaysian imports upon delivery on the first day of each quarter in order to maintain its trade relationships with the Malaysian suppliers. Yankee feels that early payment is beneficial, as other customers of the Malaysian supplier pay for their purchases only when it is required.

Since Yankee is relatively new to international trade, Jim Johnson, Yankee's chief financial officer (CFO), is concerned with the potential impact of exchange rate fluctuations on Yankee's financial performance. Johnson is vaguely familiar with various techniques available to hedge transaction exposure, but he is not certain whether one technique is superior to the others. Johnson would like to know more about the forward market, money market, and options market hedges and has asked you, a financial analyst at Yankee, to help him identify the hedging technique most appropriate for Yankee. Unfortunately, no options are available for MYR, but EUR call and put options are available for EUR125,000 per option.

Jim Johnson has gathered and provided you with the following information for Malaysia and France:

 

Malaysia

France

Current spot rate

USD 0.3200           

USD1.3000

3-month forward rate

USD0.3150

USD1.3050

Put option premium

N/A

USD0.0200

Put option strike price

N/A

USD 1.3000

Call option premium

N/A  

USD0.0150

Call option strike price

N/A  

USD 1.3000

3-month borrowing rate

4.0% p.a.

2.0% p.a.

3-month lending rate

3.5% p.a.

1.5% p.a002E

In addition to this information, Jim Johnson has informed you that the 3-month borrowing and lending rates in the United States are 2.5% p.a. and 2.0% p.a., respectively. He has also identified the following probability distributions for the exchange rates of the EUR and the MYR in three months:

Probability

Spot Rate for EUR in

3 months

Spot Rate for MYR in

3 months

5%

USD1.2500

USD0.3250

20

1.2700

0.3220

30

1.2900

0.3190

25

1.3100

0.3160

15

1.3300

0.3130

5

1.3500

0.3110

Yankee's next sales to and purchases from Malaysia will occur one quarter from now. If Yankee decides to hedge, Johnson will want to hedge the entire amount subject to exchange rate fluctuations, even if it requires overhedging (i.e., hedging more than the needed amount).

Currently, Johnson expects the imported components from Malaysia to cost approximately MYR300 per pair of Speedos. Johnson has asked you to answer the following questions for him:

Yankee's next sales to and purchases from Malaysia will occur one quarter from now. If Yankee decides to hedge, Johnson will want to hedge the entire amount subject to exchange rate fluctuations, even if it requires overhedging (i.e., hedging more than the needed amount). Currently, Johnson expects the imported components from Malaysia to cost approximately MYR300 per pair of Speedos. Johnson has asked you to answer the following questions for him:

1. Using an Excel spreadsheet, compare the hedging alternatives for the MYR with a scenario under which Yankee remains unhedged. Do you think Yankee should hedge or remain unhedged? If Yankee should hedge, which hedge is most appropriate?

2. Using an Excel spreadsheet, compare the hedging alternatives for the EUR receivables with a scenario under which Yankee remains unhedged. Do you think Yankee should hedge or remain unhedged? Which hedge is the most appropriate for Yankee?

3. In general, do you think it is easier for Yankee to hedge its inflows or its outflows denominated in foreign currencies? Why?

4. Would any of the hedges you compared in Question 2 for the EUR to be received in three months require Yankee to overhedge? Given Yankee's exporting arrangements, do you think it is subject to overhedging with a money market hedge?

5. Could Yankee modify the timing of the Malaysian imports in order to reduce its transaction exposure? What is the tradeoff of such a modification?

6. Could Yankee modify its payment practices for the Malaysian imports in order to reduce its transaction exposure? What is the tradeoff of such a modification?

7. Given Yankee's exporting agreements, are there any long-term hedging techniques Yankee could benefit from? For this question only, assume that Yankee incurs all of its costs in the United States.

Reference no: EM13482863

Questions Cloud

1 conduct a dupont decomposition of lucents roe for the : 1. conduct a dupont decomposition of lucents roe for the 1998 1999 and 2000 first december quarters.what factors
Indicate which statement you would examine to find each of : indicate which statement you would examine to find each of the following items income statement i balance sheet b
2010 dec 16 accepted a 10500 60-day 6 note dated this day : 2010 dec. 16 accepted a 10500 60-day 6 note dated this day in granting todd duke a time extension on his past-due
He following items were taken from a recent income : eskimo pie corporation markets a broad range of frozen treats including its famous eskimo pie ice cream bars. the
Yankee inc a us based mnc has recently decided to expand : yankee inc. a u.s. based mnc has recently decided to expand its international trade relationship by exporting to
Stone inc is evaluating a project with an initial cost of : stone inc. is evaluating a project with an initial cost of 8450. cash inflows are expected to be 1000 1000 and 10000 in
Comparing integer programming and linear programming : comparing integer programming and linear programming please respond to the following explain how the applications of
In alphabetical order below are balance sheet items for : in alphabetical order below are balance sheet items for wyoming company at december 31 2012. prepare a balance
Determine whether each transaction affects common stock c : presented below are a number of transactions. determine whether each transaction affects common stock c dividends d

Reviews

Write a Review

Finance Basics Questions & Answers

  How many after-tax dollars

How many after-tax dollars did she receive per year from Policy A?

  Outcome on the accounting equation on payment of interest

Outcome on the accounting equation on payment of interest on the loan payable in due and in advance

  Compare and contrast internal rate of return irr the net

compare and contrast the internal rate of return irr the net present value npv and payback approaches to capital

  Why does money have a time value

Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of "time value of money?"

  Compute degree of total leverage

Kermit's Hardware's fixed operating costs are $20.8 million and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9 percent.

  Calculate the npv and irr without mitigation

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR %

  Calculating maturity risk premium

The real risk free rate is 3 percent, and inflation is expected to be 3 percent for the next 2 years. A 2-year Treasury security yields 6.2 percent.

  Question on payout policy

Find out the expected stream of dividends per share for investor who plans to retain his shares rather than sell them back to the company? Check your estimate of share vaue by discounting this stream of dividends per share.

  The ceo of your firm is eeking advice concerning the

the ceo of your firm is eeking advice concerning the capital structure for a proposed new project. advise the ceo as to

  Calculate hassan madhatter total assets

Last year, Hassan's Madhatter, Inc., had an ROA of 7 percent, a profit margin of 12.95 percent, and sales of $20 million. Calculate Hassan's Madhatter's total assets.

  On january 1 20d a company issued 5 million of 10-year

on january 1 20d a company issued 5 million of 10-year bonds at a 10 stated interest rate to be paid semiannually. the

  Discuss the impact of bank capital standards

Discuss the impact of bank capital standards under the Basel Accord on the stability of the banking system.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd