国际财务管理课后习题答案chapter 8.docx
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国际财务管理课后习题答案chapter8
CHAPTER8MANAGEMENTOFTRANSACTIONEXPOSURE
SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMS
QUESTIONS
1.Howwouldyoudefinetransactionexposure?
Howisitdifferentfromeconomicexposure?
Answer:
Transactionexposureisthesensitivityofrealizeddomesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrenciestounexpectedchangesinexchangerates.Unlikeeconomicexposure,transactionexposureiswell-definedandshort-term.
2.Discussandcomparehedgingtransactionexposureusingtheforwardcontractvs.moneymarketinstruments.Whendothealternativehedgingapproachesproducethesameresult?
Answer:
Hedgingtransactionexposurebyaforwardcontractisachievedbysellingorbuyingforeigncurrencyreceivablesorpayablesforward.Ontheotherhand,moneymarkethedgeisachievedbyborrowingorlendingthepresentvalueofforeigncurrencyreceivablesorpayables,therebycreatingoffsettingforeigncurrencypositions.Iftheinterestrateparityisholding,thetwohedgingmethodsareequivalent.
3.Discussandcomparethecostsofhedgingviatheforwardcontractandtheoptionscontract.
Answer:
Thereisnoup-frontcostofhedgingbyforwardcontracts.Inthecaseofoptionshedging,however,hedgersshouldpaythepremiumsforthecontractsup-front.Thecostofforwardhedging,however,mayberealizedexpostwhenthehedgerregretshis/herhedgingdecision.
4.Whataretheadvantagesofacurrencyoptionscontractasahedgingtoolcomparedwiththeforwardcontract?
Answer:
Themainadvantageofusingoptionscontractsforhedgingisthatthehedgercandecidewhethertoexerciseoptionsuponobservingtherealizedfutureexchangerate.Optionsthusprovideahedgeagainstexpostregretthatforwardhedgermighthavetosuffer.Hedgerscanonlyeliminatethedownsideriskwhileretainingtheupsidepotential.
5.SupposeyourcompanyhaspurchasedaputoptionontheGermanmarktomanageexchangeexposureassociatedwithanaccountreceivabledenominatedinthatcurrency.Inthiscase,yourcompanycanbesaidtohavean‘insurance’policyonitsreceivable.Explaininwhatsensethisisso.
Answer:
Yourcompanyinthiscaseknowsinadvancethatitwillreceiveacertainminimumdollaramountnomatterwhatmighthappentothe$/€exchangerate.Furthermore,iftheGermanmarkappreciates,yourcompanywillbenefitfromtherisingeuro.
6.RecentsurveysofcorporateexchangeriskmanagementpracticesindicatethatmanyU.S.firmssimplydonothedge.Howwouldyouexplainthisresult?
Answer:
Therecanbemanypossiblereasonsforthis.First,manyfirmsmayfeelthattheyarenotreallyexposedtoexchangeriskduetoproductdiversification,diversifiedmarketsfortheirproducts,etc.Second,firmsmaybeusingself-insuranceagainstexchangerisk.Third,firmsmayfeelthatshareholderscandiversifyexchangeriskthemselves,renderingcorporateriskmanagementunnecessary.
7.Shouldafirmhedge?
Whyorwhynot?
Answer:
Inaperfectcapitalmarket,firmsmaynotneedtohedgeexchangerisk.Butfirmscanaddtotheirvaluebyhedgingifmarketsareimperfect.First,ifmanagementknowsaboutthefirm’sexposurebetterthanshareholders,thefirm,notitsshareholders,shouldhedge.Second,firmsmaybeabletohedgeatalowercost.Third,ifdefaultcostsaresignificant,corporatehedgingcanbejustifiablebecauseitreducestheprobabilityofdefault.Fourth,ifthefirmfacesprogressivetaxes,itcanreducetaxobligationsbyhedgingwhichstabilizescorporateearnings.
8.Usinganexample,discussthepossibleeffectofhedgingonafirm’staxobligations.
Answer:
Onecanuseanexamplesimilartotheonepresentedinthechapter.
9.Explaincontingentexposureanddiscusstheadvantagesofusingcurrencyoptionstomanagethistypeofcurrencyexposure.
Answer:
Companiesmayencounterasituationwheretheymayormaynotfacecurrencyexposure.Inthissituation,companiesneedoptions,notobligations,tobuyorsellagivenamountofforeignexchangetheymayormaynotreceiveorhavetopay.Ifcompanieseitherhedgeusingforwardcontractsordonothedgeatall,theymayfacedefinitecurrencyexposure.
10.Explaincross-hedginganddiscussthefactorsdeterminingitseffectiveness.
Answer:
Cross-hedginginvolveshedgingapositioninoneassetbytakingapositioninanotherasset.Theeffectivenessofcross-hedgingwoulddependonthestrengthandstabilityoftherelationshipbetweenthetwoassets.
PROBLEMS
1.CrayResearchsoldasupercomputertotheMaxPlanckInstituteinGermanyoncreditandinvoiced€10millionpayableinsixmonths.Currently,thesix-monthforwardexchangerateis$1.10/€andtheforeignexchangeadvisorforCrayResearchpredictsthatthespotrateislikelytobe$1.05/€insixmonths.
(a)Whatistheexpectedgain/lossfromtheforwardhedging?
(b)IfyouwerethefinancialmanagerofCrayResearch,wouldyourecommendhedgingthiseuroreceivable?
Whyorwhynot?
(c)Supposetheforeignexchangeadvisorpredictsthatthefuturespotratewillbethesameastheforwardexchangeratequotedtoday.Wouldyourecommendhedginginthiscase?
Whyorwhynot?
Solution:
(a)Expectedgain($)=10,000,000(1.10–1.05)
=10,000,000(.05)
=$500,000.
(b)IwouldrecommendhedgingbecauseCrayResearchcanincreasetheexpecteddollarreceiptby$500,000andalsoeliminatetheexchangerisk.
(c)SinceIeliminateriskwithoutsacrificingdollarreceipt,Istillwouldrecommendhedging.
2.IBMpurchasedcomputerchipsfromNEC,aJapaneseelectronicsconcern,andwasbilled¥250millionpayableinthreemonths.Currently,thespotexchangerateis¥105/$andthethree-monthforwardrateis¥100/$.Thethree-monthmoneymarketinterestrateis8percentperannumintheU.S.and7percentperannuminJapan.ThemanagementofIBMdecidedtousethemoneymarkethedgetodealwiththisyenaccountpayable.
(a)Explaintheprocessofamoneymarkethedgeandcomputethedollarcostofmeetingtheyenobligation.
(b)Conductthecashflowanalysisofthemoneymarkethedge.
Solution:
(a).Let’sfirstcomputethePVof¥250million,i.e.,
250m/1.0175=¥245,700,245.7
SoiftheaboveyenamountisinvestedtodayattheJapaneseinterestrateforthreemonths,thematurityvaluewillbeexactlyequalto¥25millionwhichistheamountofpayable.
Tobuytheaboveyenamounttoday,itwillcost:
$2,340,002.34=¥250,000,000/105.
Thedollarcostofmeetingthisyenobligationis$2,340,002.34asoftoday.
(b)
___________________________________________________________________
TransactionCF0CF1
____________________________________________________________________
1.Buyyensspot-$2,340,002.34
withdollars¥245,700,245.70
2.InvestinJapan-¥245,700,245.70¥250,000,000
3.Payyens-¥250,000,000
Netcashflow-$2,340,002.34
____________________________________________________________________
3.YouplantovisitGeneva,Switzerlandinthreemonthstoattendaninternationalbusinessconference.YouexpecttoincurthetotalcostofSF5,000forlodging,mealsandtransportationduringyourstay.Asoftoday,thespotexchangerateis$0.60/SFandthethree-monthforwardrateis$0.63/SF.Youcanbuythethree-monthcalloptiononSFwiththeexerciserateof$0.64/SFforthepremiumof$0.05perSF.Assumethatyourexpectedfuturespotexchangerateisthesameastheforwardrate.Thethree-monthinterestrateis6percentperannumintheUnitedStatesand4percentperannuminSwitzerland.
(a)CalculateyourexpecteddollarcostofbuyingSF5,000ifyouchoosetohedgeviacalloptiononSF.
(b)CalculatethefuturedollarcostofmeetingthisSFobligationifyoudecidetohedgeusingaforwardcontract.
(c)Atwhatfuturespotexchangeratewillyoubeindifferentbetweentheforwardandoptionmarkethedges?
(d)IllustratethefuturedollarcostsofmeetingtheSFpayableagainstthefuturespotexchangerateunderboththeoptionsandforwardmarkethedges.
Solution:
(a)Totaloptionpremium=(.05)(5000)=$250.Inthreemonths,$250isworth$253.75=$250(1.015).Attheexpectedfuturespotrateof$0.63/SF,whichislessthantheexerciseprice,youdon’texpecttoexerciseoptions.Rather,youexpecttobuySwissfrancat$0.63/SF.SinceyouaregoingtobuySF5,000,youexpecttospend$3,150(=.63x5,000).Thus,thetotalexpectedcostofbuyingSF5,000willbethesumof$3,150and$253.75,i.e.,$3,403.75.
(b)$3,150=(.63)(5,000).
(c)$3,150=5,000x+253.75,wherexrepresentsthebreak-evenfuturespotrate.Solvingforx,weobtainx=$0.57925/SF.Notethatatthebreak-evenfuturespotrate,optionswillnotbeexercised.
(d)IftheSwissfrancappreciatesbeyond$0.64/SF,whichistheexercisepriceofcalloption,youwillexercisetheoptionandbuySF5,000for$3,200.ThetotalcostofbuyingSF5,000willbe$3,453.75=$3,200+$253.75.
Thisisthemaximumyouwillpay.
4.BoeingjustsignedacontracttosellaBoeing737aircrafttoAirFrance.AirFrancewillbebilled€20millionwhichispayableinoneyear.Thecurrentspotexchangerateis$1.05/€andtheone-yearforwardrateis$1.10/€.Theannualinterestrateis6.0%intheU.S.and5.0%inFrance.Boeingisconcernedwiththevolatileexchangeratebetweenthedollarandtheeuroandwouldliketohedgeexchangeexposure.
(a)Itisconsideringtwohedgingalternatives:
selltheeuroproceedsfromthesaleforwardorborroweurosfromtheCreditLyonnaiseagainsttheeuroreceivable.Whichalternativewouldyourecommend?
Why?
(b)Otherthingsbeingequal,atwhatforwardexchangeratewouldBoeingbeindifferentbetweenthetwohedgingmethods?
Solution:
(a)Inthecaseofforw
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