Explain how Albany Corp. can reduce its economic exposure to exchange rate fluctuations.
ACC 535 Week 6 Discussion
“Transaction and Translation Exposure” Please respond to the following:
From the case study, determine whether Blades is subject to transaction, translation, or economic exposure. Provide one (1) example of the type of exposure that supports your answer. Justify your response.
From the case study, recommend whether or not Blades should import components from Japan in order to reduce its transaction exposure in the long run. Provide a rationale to support your response.
ACC 535 Week 6 Homework Homework Problems for Chapters 10, 11, and 12
1. Chapter 10. Questions and Applications: 2 (page 344).
App. 2. Assessing Transaction Exposure Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal DK40,000,000. British pound inflows equal £2,000,000 while out flows equal £1,000,000. The spot rate of the krone is $.15, while the spot rate of the pound is $1.50. Assume that the movements in the Danish krone and the British pound are highly correlated. Provide your assessment as to your firm’s degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer.
2. Chapter 10. Questions and Applications: 31 (page 347).
App. 31. Exposure of Net Cash Flows Each of the fol- lowing U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales if there are any) over the next year. Ignore any tax effects. Each firm has the same level of expected earnings. None of the firms has taken any position in exchange rate derivatives to hedge exchange rate risk. All payments for the international trade by each firm will occur 1 year from today. Sunrise Co. has ordered imports from Austria, and its imports are invoiced in euros. The dollar value of the payables (based on today’s exchange rate) from its imports during this year is $10 million. It has no international sales. year is $15 million. It has no international sales. Yamato Co. ordered imports from Italy, and its imports are invoiced in euros. The dollar value of the payables (based on today’s exchange rate) from its imports during this year is $12 million. In addi- tion, Yamato exports to Portugal, and its exports are denominated in euros. The dollar value of the receivables (based on today’s exchange rate) from its exports during this year is $8 million. Glades Co. ordered imports from Belgium, and these imports are invoiced in euros. The dollar value of the payables (based on today’s exchange rate) from its imports during this year is $7 million. Glades also ordered imports from Luxembourg, and these imports are denominated in dollars. The dollar value of these payables is $30 million. Glades has no international sales. Based on this information, which firm is exposed to the most exchange rate risk? Explain. Chapter 11. Questions and Applications: 3 (page 376).
App. 3. Money Market Hedge on Payables Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7 percent over 180 days, and the spot rate of the Mexican peso is $.10. Suggest how the U.S. firm could implement a money market hedge. Be precise.
3. Chapter 11. Questions and Applications: 33 (page 379). App. 33. Techniques for Hedging Receivables SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in 1 year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by determining the estimate (or probability distribution) of dollar revenue to be received in 1 year for each type of hedge. Spot rate of NZ$ $.54 One-year call option Exercise price 1⁄4 $.50; premium 1⁄4 $.07 One-year put option Exercise price 1⁄4 $.52; premium 1⁄4 $.03 U.S. NEW ZEALAND One-year deposit rate 9% 6% One-year borrowing rate 11 8 RATE PROBABILITY Forecasted spot rate of NZ$ $.50 20% .51 50 .53 30
4. Chapter 12. Questions and Applications: 3 (page 407).
App. 3. Reducing Economic Exposure Albany Corp. is a U.S.-based MNC that has a large government con- tract with Australia. The contract will continue for several years and generate more than half of Albany’s total sales volume. The Australian government pays Albany in Australian dollars. About 10 percent of Albany’s operating expenses are in Australian dollars; all other expenses are in U.S. dollars.
5. Chapter 12. Questions and Applications: 12 (page 408).
App. 12. Assessing Economic Exposure Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and exports them to other countries. It has no other inter- national business. The subsidiary will produce compu- ters and export them to Caribbean islands and will invoice the products in U.S. dollars. The values of the currencies in the islands are expected to remain very stable against the dollar. The subsidiary will pay wages, rent, and other operating costs in Mexican pesos. The subsidiary will remit earnings monthly to the parent. a. Would Alaska’s cash flows be favorably or unfa- vorably affected if the Mexican peso depreciates over time? b. Assume that Alaska considers partial financing of this subsidiary with peso loans from Mexican banks instead of providing all the financing with its own funds. Would this alternative form of financing increase, decrease, or have no effect on the degree to which Alaska is exposed to exchange rate movements of the peso?
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