1. A firm wants to use an option to hedge NZ$11.5 million in receivables from New Zealand firms. The premium is $0.03. The exercise price is $0.50. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
2. Assume the following information.
You have $300,000 to invest.
The spot bid rate for the euro is $1.08.
The spot ask quote for the euro is $1.10.
The 180-day forward rate (bid) of the euro is $1.08.
The 180-day forward rate (ask) of the euro is $1.10.
The 180-day interest rate in the U.S. is 6%.
The 180-day interest rate in Europe is 8%.
If you conduct CIA, what amount will you have after 180 days? Show your work.
3. The premium on a pound put option is $0.03 per unit. The exercise price is $1.60. What are the break even points for the buyer and the seller of the put option, respectively? Assume transactions costs for the buyer are $0.01 and for the seller are $0.02. Further assume both the buyer and seller of the put option are speculators.
4. What are major characteristics of currency forward contracts? List at least five of them.
5. Answer the following questions regarding international financial markets.
Recently, Walmart established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These outlets are massive and contain products purchased locally as well as imports. As Walmart generates earnings beyond what it needs in Shanzen, it may remit those earnings back to the United States. Walmart is likely to build additional outlets in Shanzen or in other Chinese cities in the future.
(a) How would the Walmart outlets in China use the spot market in foreign exchange?
(b) How might Walmart utilize the international money market when it is establishing other Walmart stores in Asia?
6. Answer the following questions regarding factors affecting exchange rates.
Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries, from a U.S. perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. What are some factors influencing this?
7. What is DFI? Provide some examples of DFI methods that MNCs utilize.
8. List the factors that affect currency put options, and briefly explain the relationship that exists for each.
9. Respond to the following items regarding testing IRP.
(a) Describe a method for testing whether IRP exists.
(b) Why are transactions costs, currency restrictions, and differential tax laws important when evaluating whether CIA can be beneficial?
10. Would the agency problem be more pronounced for Berkley Corp., which has its parent company make most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach?
11. Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. What will happen if the euro strengthens? What happens if the euro weakens? Provide a brief explanation as to why.
12. List and describe four factors to consider in multinational budgeting.