Assume a U.S. company purchases 6,000 Euro worth of goods from an Italian company, on account, and will settle the balance in Euros on December 1, 2021. Which of the following derivatives can be used to hedge foreign exchange risk? A foreign currency put option to sell Euros that will settle on December 1, 2021. A foreign currency call option to buy Euros that will settle on December 1, 2021. A forward contract to sell Euros on December 1, 2021. None of the options.
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- An investor is bullish on the euro and believes it will increase against the Japanese Yen. The investor purchases a currency call option on the euro with a strike price (exchange rate) of ¥126/€. When the investor purchases the contract, the spot rate of the euro is equivalent to ¥126/€. Assume the euro's spot price at the expiration date (market price) is ¥136/€. the premium is ¥4/€ a) Assume the euro's spot price at the expiration date (market price) is ¥136/€ The investor's profit = ¥/€ b) Assume the euro's spot price at the expiration date (market price) is ¥122/€ The investor's profit = ¥/€ c) What is the maximum loss Maximum loss = ¥/€Explain your understanding of currency hedging. Why is hedging necessary? If your company is expected to pay ¥100 million to a company in Japan on September 30, 2021 list two ways that your company can hedge this transaction.A UK company purchases chemicals from a European distributor and is required to pay for deliveries in euro. The company is risk neutral and expects the exchange rate prevailing on the future payment date to be such as to make it indifferent between taking out a forward contract for the payment date, or, being exposed to the exchange rate risk. If the payment date forward contract exchange rate is 1.50 euro/£ and the forward contract transaction cost is 0.05 euro per euro to be provided, what is the expected spot rate on payment day? A. 1.425 euro / £ B. 1.575 euro / £ C. 1.550 euro / £ D. 1.450 euro / £
- ABC Company has the Philippine peso as its functional currency. The entity expects to purchase goods from USA for $50,000 on March 31, 2023. Accordingly, the entity is exposed to a foreign currency risk. If the dollar increases before the purchase takes place, the entity will have to pay more pesos to obtain the $50,000 that it will have to pay for the goods. On October 1, 2022, the entity entered into a foreign currency forward contract with a bank speculator to purchased $50,000 in six months for a fixed amount of P2,050,000 or P41 to $1. This forward contract is designated as cash flow hedge of the entity’s exposure to increase in dollar exchange rate. On December 31, 2022, the exchange rate is P42 to $1 and on March 31, 2023, the exchange rate is P44 to $1. How much is the derivative asset (liability) on October 1, 2022?A multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollarsThe one-year interest rate in a European and a Mexican bank is 1% and 12% respectively. The spot exchange rate is EMX$/€ = 18.67 while the one -year forward exchange rate offered by the European bank is F€/MX$ = 0.05. i. Is there an opportunity for arbitrage? Calculate the interest forward exchange rate that eliminates it. ii. What steps would someone take to make an arbitrage profit, and how would he profit if he must borrow 1,000€ from a European bank?
- b) Assume that the one-year interest rate is 3% (per annum) in the UK and 2% (per annum) in the Euro area. Also, assume that the current spot exchange rate of one pound to the euro is €1.1500/£ and that the corresponding one-year forward rate is €1.1400/£. i) Provide calculations to show whether the Interest Rate Parity (IRP) theory holds. ii) A UK-based investor has £200,000 to invest for a year either in the Euro area or the UK. Using the above information, determine which investment will generate a higher return for them. iii) Discuss the extent to which your results in i) and ii) above provide support to the Covered Interest Rate Parity (CIRP) condition.Johnson Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2022, with payment of 25,000 dinars to be received on March 1, 2023. Johnson enters into a forward contract on December 1, 2022, to sell 25,000 dinars on March 1, 2023. The forward contract is not designated as a hedge. Relevant exchange rates for the dinar on various dates are as follows: Date December 1, 2022 December 31, 2022 March 1, 2023 O $1,500 O $1,800 O $2,400 Spot Rate O $2,000 $2.26 $2.40 $2.55 In its income statement for the year ended December 31, 2023, Johnson should report a foreign currency transaction gain of Forward Rate (to March 1, 2023) $2.30 2.48The spot foreign exchange rate for the US dollar is 0.69056 Euros. Yourcompany agrees to pay a bank 63,694 Euros in 3 months in exchange for 100,000US dollars. This is a foreign currency forward contract. No cash is exchanged upfront. Give the underlying asset, the maturity date, and the forward rate (for theUS dollar). Compare to the spot forward rate. Conclude
- A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0090 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is (a) $0.0084 per yen; (b) $0.0101 per yen?An investor is bearish on the euro and believes it will decrease against the Japanese Yen. The investor purchases a currency put option on the euro with a strike price (exchange rate) of ¥135/€. When the investor purchases the contract, the spot rate of the euro is equivalent to ¥132/€. the premium is ¥2/€ a) Assume the euro's spot price at the expiration date (market price) is ¥125/€ The investor's profit = ¥/€ b) Assume the euro's spot price at the expiration date (market price) is ¥137/€ The investor's profit = ¥/€ c) What is the maximum loss Maximum loss = ¥/€ d) What the maximum profit Maximum profit = ¥/€Suppose that Cloudastries Bank is a U.S.-based financial intermediary that serves the foreign exchange market. Assume that this bank is willing to both purchase and sell currency for the same rate. In other words, assume there is no bid/ask spread. Suppose Cloudastries has made the following direct quotations: Currency Dollar Spot Rate $0.55 $1.65 Mexican Peso Euro Additionally, Cloudastries has quoted a cross exchange rate of 1 euro = 3.01 pesos. After exchanging euros for pesos, the last step in triangular arbitrage is to exchange those pesos for dollars. If you exchange your 36,484.84 for dollars from Cloudastries, you would receive This represents a profit of