Multinational Business Finance Solution Manual 12th Edition by Etiman Stone Hill Moffitt Prepared by Wasim Orakzai IM Sciences KUST ISBN 0 321 1789

Multinational Business Finance 10th Edition
Solution Manual
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi
Uddin !ra"#ai
Solution Manual
Chapter-1
Financial Goals & Corporate Governance
8 9 9 1# 1# 11 12 13 1$ 1& 10
Problem # 1.1: Shareholder Returns Problem # 1.2: Shareholder Choices.. Problem # 1.3: Microsoft s !i"idend.... Problem # 1.$: !ual Classes of Common Stoc% Problem # 1.&: Cor'orate (o"ernance: Minorit) Shareholder Control Problem # 1.*: Price+,arnin-s Ratios and .c/uisitions Problem # 1.0: Cor'orate (o"ernance: 1"erstatin- ,arnin-s. Problem # 1.8: Carlton Cor'oration s Consolidated Results Problem # 1.9: Carlton s ,PS Sensiti"it) to ,2chan-e Rates.. Problem # 1.1#: Carlton3s ,arnin-s 4 (lobal 5a2ation.....
Chapter-2
The International Monetary System (IMS

6ran%furt 4 7e8 9or%................................................. Peso ,2chan-e Rate Chan-es.. (ood as Sold. (old Standard S'ot Rate Customer. 6or8ard Rate. 6or8ard !iscount on the dollars. 6or8ard Premium on the euro :ra/i :m'orts..
1$
2# 2# 22 22 22 23 23 2$ 2* %& 29 3# 31 32
Problem # 2.1: Problem # 2.2: Problem # 2.3: Problem # 2.$: Problem # 2.&: Problem # 2.*: Problem # 2.0: Problem # 2.8: Problem # 2.9:
Chapter-3
Balance o! "ayments (B#"

.ustralia s Current .ccount <ru-ua) s Current .ccount M)anmar s =alance of Pa)ments. .r-entina s =alance of Pa)ments.
Problems # 3.1 ; 3.$: Problems # 3.& ; 3.9: Problems # 3.1# ; 3.13: Problems # 3.1$ ; 3.2#:
Uddin !ra"#ai
Solution Manual
Chapter-4
Forei$n E%chan$e Mar&et (FEM

Rin--it u' or do8n>............................................... 6or8ard Premium 4 !iscounts. 5radin- in S8it?erland 9en 6or8ard Premium ,uro 6or8ard Premium.. 5ra"elin-: Co'enha-en to St. Petersbur-.. Ris%less Profit on the 6ranc.. 5rans .tlantic .rbitra-e. @all Street Aournal /uotes and 'remiums. 6inanial 5imes /uotes Bene?uelan =oli"ar C.D.. Bene?uelan =oli"ar C=D.. :ndirect Euotation on the !ollar !irect Euotation on the !ollar.. Me2ican Peso ; ,uro'ean ,uro Cross Rates .round the Forn.
'( 3* 30 $1 $2 $3 $$ $& $0 $8 $9 &# &1 &$ && &0
Problem # $.1: Problem # $.2: Problem # $.3: Problem # $.$: Problem # $.&: Problem # $.*: Problem # $.0: Problem # $.8: Problem # $.9: Problem # $.1#: Problem # $.11: Problem # $.12: Problem # $.13: Problem # $.1$: Problem # $.1&: Problem # $.1*:
Chapter-5
(&
)0 *1 *2 *3 *& *8 0# 01 02 03 0& 08 09 8# 81 82
83
Forei$n Currency 'erivatives (FC'

Peso 6utures. Pounds 6utures. Fans SchmidtG euro S'eculator.. Fans SchmidtG S8iss franc S'eculator. Hat)a 4 the )en. Samuel3s bet.. Fo8 much 'rofit I calls>. Fo8 much 'rofit I 'uts>......................................... 6allin- Canadian dollar.. =ra"eheart s Put on Pounds Call 1'tions on =ritish 'ounds Put 1'tions on euros Solar 5urbines and Bene?uelan boli"ares Bitro de Me2ico Put 1'tions on Chinese Renminbi...
Problem # &.1: Problem # &.2: Problem # &.3: Problem # &.$: Problem # &.&: Problem # &.*: Problem # &.0: Problem # &.8: Problem # &.9: Problem # &.1#: Problem # &.11: Problem # &.12: Problem # &.13: Problem # &.1$: Problem # &.1&:
Chapter-6
International "arity Conditions (I"C

=i- Mac Fambur-er Standard
Problem # *.1:
8$
Uddin !ra"#ai
'
Solution Manual
Problem # *.2: Problem # *.3: Problem # *.$: Problem # *.&: Problem # *.*: Problem # *.0: Problem # *.8: Problem # *.9: Problem # *.1#: Problem # *.11: Problem # *.12: Problem # *.13: Problem # *.1$: Problem # *.1&: Problem # *.1*: Problem # *.10: Problem # *.18: Problem # *.19: Problem # *.2#:
Chapter-7
,2chan-e Rate Pass;5hrou-h.. .r-entine 'esos.. :nternational 6isher ,ffect. Co"ered :nterest .rbitra-e CC:.D ; !enmar% : C:. !enmar% = I Part CaD 4 Part CbD C:.I Aa'an.. <nco"ered :nterest .rbitra-e I Aa'an. :nternational Parit) Conditions in ,/uilibrium. Mar) Sm)th I C:. Mar) Sm)th I <:. Mar) Sm)th ;; one month later.. Jan-%a8i :sland Resort.. Co"ered :nterest a-ainst the 7or8e-ian %rone... 6ran%furt and 7e8 9or%.. Chamoni2 chateau rentals. ,ast .siatic Com'an) I 5hailand. Maltese 6alcon: 2##3;2##$ Jondon Mone) 6und 5he .frican =eer standard of PPP.
8& 80 89 92 9$ 90 98 99 1#2 1#3 1#& 1#* 1#0 1#9 11# 111 11$ 11& 118
Forei$n E%chan$e (ate 'etermination

Current s'ot rates. Purchasin- 'o8er 'arit) forecasts. :nternational 6isher forecasts. :m'lied real interest rates 6orecastin- 8ith real interest rates... 6or8ard rates. Real economic acti"it) and miser). =alance of 'a)ments a''roach.. Current accounts and s'ot rates ,2chan-e Rate 5rends and =ounds..
1%0
122 123 12& 120 129 131 133 13& 13& 13&
Problem # 0.1: Problem # 0.2: Problem # 0.3: Problem # 0.$: Problem # 0.&: Problem # 0.*: Problem # 0.0: Problem # 0.8: Problem # 0.9: Problem # 0.1#:
Chapter-8
Transaction E%posure
Ji'itor in :ndonesia ,mbraer of =ra?il.. Mattel 5o)s Findustan Je"er 5e% ; :talian .ccount Recei"able 5e% ; Aa'anese .ccount Pa)able..
1')
130 138 139 1$# 1$1 1$3
Problem # 8.1: Problem # 8.2: Problem # 8.3: Problem # 8.$: Problem # 8.&: Problem # 8.*:
Uddin !ra"#ai
Solution Manual
Problem # 8.0: Problem # 8.8: Problem # 8.9: Problem # 8.1#: Problem # 8.11: Problem # 8.12: Problem # 8.13: Problem # 8.1$: Problem # 8.1&: Problem # 8.1*: Problem # 8.10: Problem # 8.18: Problem # 8.19: Problem # 8.2#: Problem # 8.21: Problem # 8.22: Problem # 8.23: Problem # 8.2$: Problem # 8.2&:
Chapter-9
5e% ; =ritish 5elecom =id 5e% ;; S8edish Price Jist 5e% ;; S8iss !i"idend Pa)able.. 7orthern Rain8ear... Bamo Road :ndustries. @orld8ide 5ra"el. Seattle ScientificG :nc.. @ilmin-ton Chemical Com'an) !a8-;(ri'G :nc..... ./ua;Pure. =oto2 @atch Com'an) Red8all Pum' Com'an) Pi2el s 6inancial Metrics. Scout 6inch and !a)ton Manufacturin- C.D. Scout 6inch and !a)ton Manufacturin- C=D. Siam Cement .s8an ProKect: Mitsubishi s ,2'. CPart a 4 bD .s8an ProKect: 6luor s ,2'osure.. .s8an ProKect: !aSil"a s Contin-enc) Je"er..
1$& 1$* 1$8 1&# 1&1 1&2 1&3 1&$ 1&& 1&0 1&9 1*# 1*2 1*3 1*& 1*0 1*8 101 103
#peratin$ E%posure
1+*
10& 10* 108 108 109 18# 181 182 183 18&
Problem # 9.1: Carlton (erman) ; Case $ Problem # 9.2: Carlton (erman) ; Case & Problem # 9.3: !en"er Plumbin- Com'an) C.D Problem # 9.$: !en"er Plumbin- Com'an) C=D... Problem # 9.&: Fa8aiian Macadamia 7uts.. Problem # 9.*: Cellini 6ashion8ear Problem # 9.0: .utocarsG Jtd.. Problem # 9.8: Fi-h;Profile PrintersG :nc. C.D Problem # 9.9: Fi-h;Profile PrintersG :nc. C=D Problem # 9.1#: Fed-in- Fo-s: Ris%;Sharin- at Farle) !a"idson.
Chapter-10
Translation E%posure ()ccountin$ E%posure

Carlton (erman) C.D.. Carlton (erman) C=D.. Carlton (erman) CCD.. Carlton (erman) C!D.. Monte"ideo ProductsG S... C.D. Monte"ideo ProductsG S... C=D.
1&+
188 189 191 192 193 19$
Problem # 1#.1: Problem # 1#.2: Problem # 1#.3: Problem # 1#.$: Problem # 1#.&: Problem # 1#.*:
Uddin !ra"#ai
Solution Manual
Problem # 1#.0: Monte"ideo ProductsG S... CCD. Problem # 1#.8: Siam 5o)sG Jtd. C.D. Problem # 1#.9: Siam 5o)sG Jtd. C=D. Problem # 1#.1#: ,-)'tian :n-otG Jtd..
Chapter-11
19* 198 2## 2#2

%0(
Sourcin$ E*uity Glo+ally

7o"o3s cost of e/uit) 'rior to .'ril 198#. 7o"o3s @.CC 'rior to .'ril 198#.... 7o"o3s cost of e/uit) after Aul) 1981.. 7o"o3s @.CC after Aul) 1981.. 7o"o3s cost of e/uit) in 2##$ 7o"o3s @.CC in 2##$ Fan-Sun- before e/uit) issue abroad. Fan-Sun-3s @.CC before e/uit) issue abroad Fan-Sun- after e/uit) issue abroad Fan-Sun-3s @.CC after e/uit) issue abroad
Problem # 11.1: Problem # 11.2: Problem # 11.3: Problem # 11.$: Problem # 11.&: Problem # 11.*: Problem # 11.0: Problem # 11.8: Problem # 11.9: Problem # 11.1#:
2#* 2#* 2#0 2#0 2#8 2#8 2#9 2#9 21# 21#
,nne-ure of .urrencies Used in Solution Manual///////// Ta0le of .ontents of ,ll For ula list////////111111111111111111111
%1% %1'
Uddin !ra"#ai
Solution Manual
,(ead and -ord is the most +ounteous. /ho teaches +y the pen. teaches man that /hich he &ne/ not0
()l12uran
Uddin !ra"#ai
Solution Manual
Chapter-1
Financial Goals & Corporate Governance
Uddin !ra"#ai
&
Solution Manual
Chapter 3 1
,Financial Goals & Corporate Governance4
"ro+lem 3 1015 Shareholder returns0 Solution5 What are the shareholder2s returns3 )ssumptions Share price, P1 Share price, P% 5i6idend paid, 5% 6alue "art (a 4 1)100 4 1&100 4 7777 6alue "art (+ 4 1)100 4 1&100 4 1100
a0 I! the company paid no dividend (plu$$in$ 7ero in !or the dividend 5 8eturn 9 :P% 7 P1 ; 5%< = :P1< 8eturn 9 41&100 7 4 1)100 = 41)100 9 4%100 = 41)100 8eturn 9 1%1(0> +0 Total shareholder return. includin$ dividends. is5 8eturn 9 :P% 7 P1 ; 5%< = :P1< 8eturn 9 :P% 7 P1 ; 5%< = :P1< 8eturn 9 41&100 7 4 1)100 ; 41100 = 41)100 9 4%100 = 41)100 8eturn 9 1&1+(> "ro+lem 3 1085 Solution5 Shareholder choices0
)ssumptions Share price, P1 Share price, P% 5i6idend paid, 5%
6alue 4 )%100 4 +*100 4 %1%(
8eturn 9 :P% 7 P1 ; 5%< = :P1< 8eturn 9 4+*100 7 4 )%100 ; %1%( = 4)%100 9 41*1%(100 = 4)%100 8eturn 9 %%1$&>
Uddin !ra"#ai
Solution Manual
The share2s e-pected return of %%1$&> far e-ceeds the re?uired return 0y Mr1 Fon@ of 1%>1 Ae should therefore a"e the in6est ent1 "ro+lem 3 1095 Microso!t:s dividend0 Solution5 What Bould the return ha6e 0een on Microsoft shares if it had paid a constant di6idend in the recent past3 Shareholder Shareholder Closin$ I! (eturn (eturn Share 'ividend (/ithout (/ith )ssumptions "rice "aid 'ividend 'ividend 1$$& :Canuary %< 41'111' 1$$$ :Canuary *< 41*1100 4011) +1('> +1)(> %000 :Canuary '< 411)1() 4011) 71+1''> 71+1%%> %001 :Canuary %< 4 *'1'& 4011) 7)%1+&> 7)%1)(> %00% :Canuary %< 4 )+10* 4011) (*1(*> (*1$1> %00' :Canuary %< 4 ('1+% 4011) 71$1&+> 71$1)'> a0 )vera$e shareholder return !or the period 5 8eturn 9 :P% 7 P1 ; 5%< = :P1< 8eturn 9 4+*100 7 4 )%100 ; 0 = 4)%100 9 41*1%(100 = 4)%100 8eturn 9 7+1(&> +0 Total shareholder return i! Microso!t had paid a constant dividend5 8eturn 9 :P% 7 P1 ; 5%< = :P1< 8eturn 9 4+*100 7 4 )%100 ; 0 = 4)%100 9 41*1%(100 = 4)%100 8eturn 9 7+1'$> "ro+lem 3 10;5 'ual Classes o! Common Stoc&0 Solution5 What are the i plications for the distri0ution of 6otin@ ri@hts and di6idend distri0utions for PoBlit#3 -ocal 6otes Currency per Total "o/lit7 Manu!acturin$ (millions share 6otes Don@7ter de0t %00 0 0 8etained earnin@s '00 0 0 Paid7in co on stoc"E 1 illion ,7shares 100 10 F1,000 Paid7in co on stoc"E * illion B7shares *00 1 FF *00
Uddin !ra"#ai
10
Solution Manual
Total lon@7ter capital <otes5 F100 - 10 9 1,000 6otes FF *00 - 1 9 *00 6otes
1,000
777
1,*00
a0 =hat proportion o! the total lon$1term capital has +een raised +y )1shares> ,7shares = Total lon@7ter capital 9 100 = 1,000 9 10100>
+0 =hat proportion o! votin$ ri$hts is represented +y )1shares> ,7share total 6otes = Total Gotes 9 1,000 = 1,*00 9 +11*'> c0 =hat proportion o! the dividends should the )1shares receive> ,7shares in local currency = Total e?uity shares in local currency 9 100 = :100 ; *00< 9 %0100> "ro+lem 3 10?5 Corporate Governance5 Minority Shareholder Control Solution5 5istri0ution of profits 6ersus distri0ution of 6otin@ ri@hts and poBer1 Solpart "articpacoes 6otin$ "re!erred Total Shares Shares Shares '&100> '&100> '&100> '1(%> *11(%> (1100> +1*&> (&1*&> 100100> 1$1&*> (+1&*> 0100> *%11)> *%11)> 101&&> *&1&&> %&100> %'11%> (111%>
a Investor Group Teleco Italia Pension Funds '%> of Techold Particpacoes shares :01'% :11><H 01'% :)%><H and 01'% :'*>< .o 0ined Teleco Italia I Pension Funds !pportunity 100> of Ti epart Particpacoes shares )&> of Techold Particpacoes shares .o 0ined !pportunity Total Shares
100100> 100100> Participacoes,
+ !pportunity Bould continue to control the 6otin@ ri@hts of SolPart, Bhich in turn
continues to oBn (&1*&> of the 6otin@ shares in Brasil Teleco
Uddin !ra"#ai
11
Solution Manual
Bhich in turn oBns $'1)> of the 6otin@ shares in Brasil Teleco 1 Thus !pportunity is a0le to use its control of holdin@ co panies to control Brasil Teleco 1 "ro+lem 3 10@5 Solution5 "riceAEarnin$s (atios and )c*uisitions Mar&et value per share 4%0100 4*0100
Company Phar 7Italy Phar 7US,
"AE <um+er (atio o! shares 10,000,0 %0 00 10,000,0 *0 00
Earnin$s 410,000,000 410,000,000
E"S 41100 41100
Total Mar&et 6alue 4%00,000,000 4*00,000,000
8ate of e-chan@eE Phar 7US, shares per Phar 7Italy share 9 (,(00,000
a1 Bo/ many shares /ould "harm1CS) have outstandin$ a!ter the ac*uisition
o! "harm1Italy> 410,000,000 ; (,(00,000 9 1(,(00,000 Because Phar 7Italy shares are Borth 4%0 per share, they are only Borth one7half the 6alue per share of Phar 7US,2s 4*0 per share1 So, on a strai@ht e-chan@e, 1 Phar 7US, share is Borth % Phar 7Italy shares1 But, Phar 7US, also needs to pay a pre iu for @ainin@ control of Phar 7Italy, so it pays an additional 10> o6er ar"et1 So, Phar 7US, paysE 10 illion = % - :1 ; 10> pre iu < 9 +0 =hat /ould +e the consolidated earnin$s o! the com+ined "harm1CS) and "harm1Italy> Phar 7Italy earnin@s ; Phar 7US, earnin@s 9 4%0,000,000 c0 )ssumin$ the mar&et continues to capitali7e "harm1CS):s earnin$s at a "AE ratio o! ;0. /hat /ould +eD
Uddin !ra"#ai
1%
Solution Manual
P=E - .onsolidated earnin@s 9 *0 - 4%0,000,000 9 4&00,000,0001
d0 =hat is the ne/ earnin$s per share o! "harm1CS)> 4%0,000,000 = 1(,(00,000 shares 9 411%$ e0 =hat is the ne/ mar&et value o! a share o! "harm1CS)> JeB ar"et 6alue = Total shares outstandin@9 4&00,000,000 =1(,(00,000 9 4(11)1 !0 Bo/ much did "harm1CS):s stoc& price increase> Share price rose fro 4*0100 to 4(11)11 Percenta@e increase 9 %$10'> $0 )ssume that the mar&et ta&es a ne$ative vie/ o! the ac*uisition and lo/ers "harm1CS):s "AE ratio to 900 =hat /ould +e the ne/ mar&et price per share o! stoc&> =hat /ould +e its percenta$e loss> JeB JeB ar"et 6alue 9 Total earnin@s - P=E 9 4%0,000,000 - '0 9 4)00,000,000 ar"et price per share 9 total ar"et 6alue = shares outstandin@ 9 4'&1+1
Percenta@e loss to ori@inal Phar 7US, shareholders 9 :4'&1+1 7 4*0100< = :4*0100< 9 7 '1%'> "ro+lem 3 10E5 Corporate Governance5 #verstatin$ Earnin$s Mar&et value per share 4 %0100 4%0100 Total Mar&et 6alue 4%00,000,000 4%00,000,000
Solution5
Company "AE ratio <um+er o! shares 10,000,000 10,000,000 Earnin$s 410,000,000 4(,000,000 E"S 41100 41100
Phar 7Italy %0 Phar 7US, *0
I! earnin$s /ere lo/ered to F? million !rom the previously reported F10 million. could "harm1CS) still do the deal>
Uddin !ra"#ai
1'
Solution Manual
To do the deal, Phar 7Italy2s shareholders need to 0e paid their 10> pre iu 9 4%%0,000,000
ar"et 6alue plus a illion=4%0
,t neB ar"et rates for Phar 7US,, this Bould re?uire the offer of :4%%0 per share< 9 11,000,000100 Shares
These 11 illion shares Bould e-ceed Phar 7US,2s e-istin@ shares outstandin@, effecti6ely @i6in@ Phar 7Italy control1 Therefore the ac?uisition Bould pro0a0ly not ta"e place1
"ro+lem 3 10G5 Solution5 S0<o0
Carlton Corporation:s Consolidated (esults 1 )mount *,(00100 ),%(0100 *,(00100 %,(00100 8 Ta% rate '(> %(> *0> '0> 1% 8H9 Corporate Income ta%es 4 1,(+(100 84 1,()%1(0 L 1,&00100 8 0 +(0100 Chinese Su+sidiary (renmin+i. (m+ %,(0 0100 :+( 0100< 1,+( 0100 &1 (000 4 %0(1&&
US Parent .o pany :US4< Bra#ilian Su0sidiary :reais, 84< Ker an Su0sidiary :Euros, L< .hinese Su0sidiary :8en in0i, 8 0<
Business "er!ormance (000s Earnin@s 0efore ta-es, EBT : local currency< DessE .orporate inco e ta-es Jet profits of indi6idual su0sidiary ,6era@e e-chan@e rate for the period :forei@n currency = 4< Jet profits of indi6idual su0sidiary :US4<
CS "arent Bra7ilian German Company Su+sidiary Su+sidiary (CSF (reais. (F (euros. I *,(00 ),%(0 *,(00 100 100 100 :1,(+( :1,()% :1,&00 100< 1(0< 100< %,$%( *,)&+ %,+00 100 1(0 100 777777 4 %,$%(100 '1( 000 )00 4 1,''$1%$ 01$%
4 %,$1(1++
Uddin !ra"#ai
1*
Solution Manual
.onsolidated profits :total across units< Total diluted shares outstandin@ :000s< a0 Consolidated earnin$s per share (E"S +0 "roportion o! total pro!its ori$inatin$ +y country c0 "roportion o! total pro!its ori$inatin$ !rom outside the CS0 "ro+lem 3 10J5 Solution5 S0<o0
4 +,'&(1$' )(0 100 4 111') '$1)> )01*> 1&11> '$1(> %1&>
Carlton:s E"S Sensitivity to E%chan$e (ates 1 )mount *,(00100 ),%(0100 *,(00100 %,(00100 8 Ta% rate '(> %(> *0> '0> 1% 8H9 Corporate Income ta%es 4 1,(+(100 84 1,()%1(0 L 1,&00100 8 0 +(0100 Chinese German Su+sidiary Su+sidiary (renmin+i. (euros. I (m+ *,(00 100 %,(00100 :1,&00 :+(010 100< 0< %,+00 1,+(010 100 0 &1
US Parent .o pany :US4< Bra#ilian Su0sidiary :reais, 84< Ker an Su0sidiary :Euros, L< .hinese Su0sidiary :8en in0i,8 0<
Business "er!ormance (000s Earnin@s 0efore ta-es, EBT :local currency< DessE .orporate inco e ta-es Jet profits of indi6idual su0sidiary ,6@ e-chan@e rate for the
CS "arent Company (CSF
Bra7ilian Su+sidiary (reais. (F
*,(00100 ),%(0100 :1,(+ :1,()% (100< 1(0< %,$% *,)&+ (100 1(0 777777 *1(000
Uddin !ra"#ai
1(
Solution Manual
period :fc=4< Jet profits of indi6idual su0sidiary :US4< .onsolidated profits :total across units< Total diluted shares outstandin@ :000s< Baseline EPS
01$%)00 4%,$%(100 4 +,0&&1'% )( 0100 4111') 41,0*11)+ 4%,$1(1++
(000 4%0(1&&
a1 If Bra#ilian real falls to 84*1(0=4E EPS 9 4 101$1 EPS has fallen * percent fro 0aseline 9 7 *10> Chinese CS "arent Bra7ilian German Su+sidiary Company Su+sidiary Su+sidiary (renmin+i. (CSF (reais. (F (euros. I (m+ *,(00 *,(00100 ?.G00000 100 %,(00100 :1,(+ :1,()% :1,&00 :+(0 (100< 1(0< 100< 100< %,$% %,+00 1,+(0 (100 ;.9?0000 100 100 01$% 777777 4%,$%(100 4 +,01'1'% )( 0100 4111') *1(000 4$))1)+ )00 4%,$1(1++ 000 4%0(1&& &1(
Business "er!ormance (000s Earnin@s 0efore ta-es, EBT :local currency< DessE .orporate inco e ta-es Jet profits of indi6idual su0sidiary ,6@ e-chan@e rate for the period :fc=4< Jet profits of indi6idual su0sidiary :US4< .onsolidated profits :total across units< Total diluted shares outstandin@ :000s< Baseline EPS
+0 If Bra#ilian real falls to 84*1(0=4E EPS 9 4 101+$ EPS has fallen * percent fro 0aseline 9 7 (10>
Uddin !ra"#ai
1)
Solution Manual
"ro+lem 3 10105 Carlton:s Earnin$s & Glo+al Ta%ation Solution5 1 8 1% 8H9 ; S0<o0 US Parent .o pany :US4< Bra#ilian Su0sidiary :reais, 84< Ker an Su0sidiary :Euros, L< .hinese Su0sidiary :8en in0i, 8 0< )mount *,(00100 ),%(0100 *,(00100 %,(00100 Ta% rate '(> %(> *0> '0> Corporate E%chan$e Income ta%es (ate 4 1,(+(100 84 1,()%1(0 L 1,&00100 77777 84'1(000 =4 L01$%)00 =4 8 0 &1(000
9 K ; H? Corporate Income ta%es in F 41,(+(100 4 **)1*' 41,$*'1&* 4 &&1%*
8 0 +(0100 Bra7ilian Su+sidiary (reais. (F
Business "er!ormance (000s Earnin@s 0efore ta-es, EBT :local currency< DessE .orporate inco e ta-es Jet profits of indi6idual su0sidiary ,6era@e e-chan@e rate for the period :forei@n currency = 4< Jet profits of indi6idual su0sidiary :US4< .onsolidated profits :total across units< Total diluted shares outstandin@ :000s< Baseline EPS Ta- pay ents 0y country in
CS "arent Company (CSF
*,(00100 ),%(0100 :1,(+ :1,()% (100< 1(0< %,$% *,)&+ (100 1(0 777777 4%,$%(100 4 +,'&(1$' )( 0100 4111') 41,(+(100 '1(000 41,''$1%$
Chinese German Su+sidiary Su+sidiary (renmin+i. (euros. I (m+ *,(00 100 %,(00100 :1,&00 :+(0 100< 100< %,+00 1,+(0 100 100 01$%)00 4 %,$1(1++ &1(000 4%0(1&&
4 **)1*'
4 1,$*'1&*
4 &&1%*
Uddin !ra"#ai
1+
Solution Manual
US dollars
a0 Total @lo0al ta- 0ill, US4 9 41,(+(100 ; 4 **)1*' ; 4 1,$*'1&* ; 4 &&1%*
Total @lo0al ta- 0ill, US4 9 4 *,0('1(1 "art +0 CS "arent Bra7ilian Business "er!ormance Company Su+sidiary (000s (CSF (reais. (F EBT 0y country, US4 4 *,(00100 41,+&(1+1 .onsolidated EBT 411,*'$1** Total Klo0al ta- 0ill in 4 4 *,0('1(1 .arlton2s Effecti6e ta- rate '(1*'> Calculation <otes5 .onsolidated EBT 9 4 *,(00100 ; 41,+&(1+1 ; 4*,&($1)1 ; 4 %$*11% .onsolidated EBT 9 F11.;9J0;; Total @lo0al ta- 0ill, US4 9 F ;.0?90?1 9M 4 *,0('1(1 N 411,$'$1** 9 '(1*'> c0 =hat /ould +e the impact on Carlton:s E"S and $lo+al e!!ective ta% rate i! Germany instituted ta% cut to 8GL and German su+sidiary earnin$s rose to ? million euros> ,fter plu@@in@ in the neB 6alues, EPS 9 4 1%1&) Effecti6e ta- rate 9 '01%0> 1 8 1% 8H9 ; 9 K ; H? Corporate S0<o0 )mount Ta% Corporate E%chan$e Income rate Income ta%es (ate ta%es in F US Parent .o pany :US4< *,(00100 '(> 4 1,(+(100 77777 41,(+(100 Bra#ilian Su0sidiary :reais, 84< ),%(0100 %(> 84 1,()%1(0 84'1(000 =4 4 **)1*' Ker an Su0sidiary :Euros, L< *,(00100 8GL I 1.8@0000 I00J8@00 AF F 1.9@00@J .hinese Su0sidiary :8en in0i, 8 0< %,(00100 '0> 8 0 +(0100 8 0 &1(000 4 &&1%* Total @lo0al ta- 0ill, US4 9 41,(+(100 ; 4 **)1*' ; 4 1,')01)$ ; 4 &&1%* Total @lo0al ta- 0ill, US4 9 F 9.;E009J .onsolidated EBT 9 4 *,(00100 ; 41,+&(1+1 ; 4 *,$111(' ; 4 %$*11% .onsolidated EBT 9 F11.;J10 9@ Chinese German Su+sidiary Su+sidiary (renmin+i. (euros. I (m+ 4*,&($1)1 4 %$*11%
Uddin !ra"#ai
1&
Solution Manual
9M 4 ',*+01'$ N 411,*$111') 9 '01%0> Effecti6e ta- rate
Chapter-2 The International Monetary System (IMS
Uddin !ra"#ai
1$
Solution Manual
Chapter 3 8
,The International Monetary System4
"ro+lem 3 8015 Fran&!urt & <e/ Mor&0 In Fran"furt I JeB Oor" one can 0uy a U1S1 dollar for L01$%001 In JeB Oor", one can 0uy a euro for 4110&+01 What is the forei@n e-chan@e rate 0etBeen the dollar I the euro3 Ki6en 5ata !ne can 0uy a U1S1 dollar 9 L01$%00 = 4 !ne can 0uy a Euro 9 4110&+0 = L Forei@n E-chan@e 8ate 0etBeen 9 3 Solution5 L01$%00 = 4 4110&+0 = L or or 4 110&+ = L L 01$% = 4 :Indirect Puotation< :5irect Puotation<
"ro+lem 3 808 5 "eso E%chan$e (ate Chan$es0 In 5ece 0er 1$$* the @o6t1 of Me-ico officially chan@ed the 6alue of Me-ican peso fro '1%0 peso per dollar to (1(0 peso per dollar1 Was this de6aluation, re6aluation, depreciation, or appreciation3 What Bas the percenta@e chan@e3 Solution5 Given 'ata Initial E-chan@e 8ate 5e6alued E-chan@e 8ate 9 9 Ps '1%0 = 4 Ps (1(0 = 4
To find percenta@e chan@e, Be use indirect ?uotation for ula, Bhich is @i6en as underH
Uddin !ra"#ai
%0
Solution Manual
,nyti e a @o6ern ent sets or resets the 6alue of its currency, it is a ana@ed or fi-ed e-chan@e rate1 If that is the case, any chan@e in its official 6alue ust 0e either a Qre6aluationQ or Qde6aluation1Q In this case, de6aluation is occurred1 This is e6ident fro the fact that it noB ta"es ore pesos per U1S1 dollar, so its 6alue is less or de6alued1 In ter s of the percenta@e chan@e calculation, this is indicated 0y the ne@ati6e percenta@e chan@e1 (echec&in$ Method5 To find percenta@e chan@e, Be use direct *uotation for ula in U1S1, Bhich is @i6en as underH Initial E-chan@e 8ate 9 Ps'1%0 = 4 or 4 011&1&= Ps 5e6alued E-chan@e 8ate 9 Ps(1(0 = 4 or 4 01'1%(= Ps
In this case, de6aluation is occurred1 Aence, 6erified1
Uddin !ra"#ai
%1
Solution Manual
"ro+lem 38095 Good as Sold0 Under the @old standard the price of the ounce of @old of U1S1 dollars Bas 4%01)+ Bhile the price of the sa e ounce of British pounds Bas R*1%*+*1 What Bould the e-chan@e rate 0etBeen the dollar and the pound 0e if the U1S1 dollar price had 0een 4'&100 per ounce3 Solution5 Ki6en 5ata The U1S1 dollar price 9 4%01)+ per ounce The U1S1 dollar price 9 4'&100 per ounce The British pounds price 9 R*1%*+* per ounce
"ro+lem 3 80;5 Gold Standard0 Before World War I, 4%01)+ Bas needed to 0uy one ounce of @old1 If, at the sa e ti e one ounce of @old can 0e purchased in France for FF'10100 Bhat Bas the e-chan@e rate 0etBeen French francs I U1S dollars3 Solution5 Given 'ata The U1S1 dollar price The French franc price 9 4%01)+ per ounce 9 FF '1010 0 per ounce
"ro+lem 3 80?5 Spot (ate Customer1 The spot rate for Me-ican pesos is Ps$1(%00=41 If your co pany 0uys Ps 100,000 spot fro 0an" on Monday, hoB uch ust your co pany pay I on Bhat day3 Solution5 Given 'ata The spot rate for Me-ican pesos 9 Ps $1(%00 = 4 or 40110(0*% = Ps If your co pany 0uys 9 Ps 100,000 spot on Monday
Uddin !ra"#ai
%%
Solution Manual
It depends on co pany that the a ount pays in pesos or dollars on Monday1 "ro+lem 3 80@5 For/ard (ate0 The 1&07day forBard rate for the euro is ?uoted at L01$%10=41 If your co pany 0uys L 100,000 forBard 1&07days on Septe 0er ), %00', hoB uch ust your co pany pay I on Bhat date to settle the forBard a@ree ent3 Solution5 Ki6en 5ata 1&07day forBard rate for the Euro is ?uoted 9 L 01$%10= 4 or 4 110&(+ = L If your co pany 0uys 9 L100,000 forBard 1&07days on Septe 0er ), %00'
It depends on co pany that the a ount pays in euro or dollars1 The forBard a@ree ent Bill settle on March &, %00* on Monday1 "ro+lem 3 80E5 For/ard 'iscount on the dollars0 What is the forBard discount on the dollar if the spot rate is 4 110%00 = L I 1&07days forBard rate is 4 110&(& = L3 Solution5 Ki6en 5ata Spot rate is 9110%00 = L 1&07days forBard rate is 9 4 110&(& = L
Uddin !ra"#ai
%'
Solution Manual
"ro+lem 380G5 For/ard "remium on the euro0 What is the forBard pre iu on the euro if the spot rate on Septe 0er ', %00' is L 01$&0* = 4 I 1&07days forBard rate is L 01$%10 = 43 Solution5 Ki6en 5ata Spot rate 9 L 01$&0* = 4 1&07days ForBard rate 9 L 01$%10 = 4
Uddin !ra"#ai
%*
Solution Manual
<ote5 Pro0le S + I & are opposite in rates1 Both ?uestions ansBer are sa e 0ecause Spot 8ate 9 4 110%00 = L or L 01$&0* = 4 1&0 5ays ForBard 8ate 9 4 110&(& = L or L 01$%10 = 4
Uddin !ra"#ai
%(
Solution Manual
"ro+lem 3 80J5 Ira*i Imports0 , European70ased anufacturer ships a achine tool to a 0uyer in Cordan at a sale price of L'+(,0001 Cordan i poses a 1%> i port duty on all products purchased fro the European Union1 The Cordanian i porter then re7 e-ports the product to an Ira?i i porter, 0ut only after i posin@ their oBn resale fee of %%>1 Ki6en the folloBin@ spot e-chan@e rates on Canuary '0, %00', Bhat is the total cost to the i porter in Ira?i dinar, and Bhat is the U1S1 dollar e?ui6alent of that price3 Spot rate, Cordanian dinar :C5< per euro :L< C5 01+($+ = L Spot rate, Cordanian dinar :C5< per dollar :M< C5 01+0(1 = M Spot rate, Ira?i dinar:I5< per Cordanian dinar :A!< I5 ',&*' = A! Spot rate, Ira?i dinar :I5< per dollar :M< I5 %,+10 = M Solution5 Given 'ata Sale price, in euros :L< 9 Cordanian i port duty on EU products 9 Cordanian resale fees 9 Spot rate, Cordanian dinar :C5< per euro :L< 9 Spot rate, Cordanian dinar :C5< per dollar :M< 9 Spot rate, Ira?i dinar:I5< per Cordanian dinar :A!< 9 Spot rate, Ira?i dinar :I5< per dollar :M< 9 =hat is the dollar price a!ter all e%chan$es and !ees> Sale price. ( in N' H Sale price ( in ) % Spot rate N'A Sale price, : in C5< 9 L'+(,000 - C5 01+($+ = L 9 C5 %&*&&+1(0 Nordanian import duty H Sale price. ( in N' % Import duty( in N' Cordanian i port duty 9 C5 %&*&&+1(0 - 1%> 9 C5 '*,1&)1(0 Total cost. (in N' H Sale price. ( in N' O Nordanian import duty Total cost, :in C5< 9 C5 %&*&&+1(0 ; C5 '*,1&)1(0 Total cost, :in C5< 9 C5 '1$,0+* Nordanian resale !eesH Total cost. (in N' % Nordanian resale !ees Cordanian resale fees 9 C5 '1$,0+* - %%> 9 C5 +0,1$)1%& L '+(,000 1%> %%> C5 01+($+ = L C5 01+0(1 = M I5 ',&*' = A! I5 %,+10 = M
Uddin !ra"#ai
%)
Solution Manual
(esale price to Ira* . in N' H Total cost. (in N' O Nordanian resale !ees 8esale price to Ira? , in C5 9 C5 '1$,0+* ; C5 +0,1$)1%& 8esale price to Ira?, in C5 9 C5 '&$,%+01%& "rice paid in Ira*i diner H (esale price to Ira* ( in N' P Spot rate I' A N' Price paid in Ira?i diner 9 C5 '&$,%+01%& T I5 ',&*' = A! Price paid in Ira?i diner 9 I5 1,*$(,$)(,)&) CS dollar e*uivalent o! !inal price paid5 US dollar e?ui6alent 9 Price paid in Ira?i diner N Spot rate I5 = M US dollar e?ui6alent 9 I5 1,*$(,$)(,)&) N I5 %,+10 = M US dollar e?ui6alent 9 4((%,01)1&(&' 9U 4((%,01+ Summary o! all steps o! "ro+lem380J5 =hat is the dollar price a!ter all e%chan$es and !ees> Purchase price, con6erted to Cordanian diner :C5< L'+(,000 - C5 01&+00 = L ,dditional fees due on i portation C5 %&*&&+1(0 - 1%> Total cost, Cordanian diner :C5< 8esale fee in Cordan :C5 '1$,0+* - %%>< 8esale price to Ira? , in C5 Price paid in Ira?i diner, con6ertin@ C5 to Ira? C5 '&$,%+01%& T I5 ',&*' = A! US dollar e?ui6alent of final price paid1 I5 1,*$(,$)(,)&) N I5 %,+10 = M )mount N' 8G;GGE0?0 9;.1G@0?0 N' 91J.0E;000 E0.1J@08G N' 9GJ.8E008G
I' 1.;J?.J@?.@G@000 F??8.01E
Uddin !ra"#ai
%+
Solution Manual
Chapter-3 Balance o! "ayments
Uddin !ra"#ai
%&
Solution Manual
Chapter 3 9
,Balance o! "ayments4
"ro+lems3 901 1 90;5 )ustralia:s Current )ccount0 ,ustraliaVs .urrent ,ccount, Use the folloBin@ data fro the IMF Fund to ansBer ?uestions 1 throu@h *1
)ssumptions (millions o! CS dollars KoodsE e-ports KoodsE i ports Balance on $oods Ser6icesE credit Ser6icesE de0it Balance on services Inco eE credit Inco eE de0it Balance on income .urrent transfersE credit .urrent transfersE de0it Balance on current trans!ers Solution5 )ssumptions (millions o! CS dollars 901 =hat is )ustralia:s +alance on $oods> KoodsE e-ports DessE KoodsE i ports Balance on @oods 908 =hat is )ustralia:s +alance on services> Ser6icesE credit DessE Ser6icesE de0it Balance on ser6ices 1JJG ((,&&* )1,%1( 1?.991 1),1&1 1+,%+% 11.0J1 ),('% 1+,&*% 111.910 %,)(1 %,$'' 18G8 1JJG ((,&&* )1,%1( 7(,''1 1),1&1 1+,%+% 71,0$1 1JJJ (),0$) )(,&%) 1J.E90 1+,'(* 1&,'0* 1J?0 ),$0$ 1$,%11 118.908 ',00' ',0'% 18J 1JJJ (),0$) )(,&%) 7$,+'0 1+,'(* 1&,'0* 7$(0 8000 )*,0*1 )&,+(% 1;.E11 1&,'*) 1&,0%( 981 &,($0 1$,(1) 110.J8@ %,)%$ %,)%$ 0 8000 )*,0*1 )&,+(% 7*,+11 1&,'*) 1&,0%( '%1
Uddin !ra"#ai
%$
Solution Manual
909 =hat is )ustralia:s Balance on $oods & service> Balance on @oods 7(,''1 ,dd E Balance on ser6ices 71,0$1 Balance on @oods I ser6ice 7),*%% 90; =hat is )ustralia:s current account +alance> ,ddEBalance on @oods 7(,''1 Balance on ser6ices 71,0$1 Balance on inco e 711,'10 Balance on current transfers 7%&% )ustralia:s CA) +alance 71&,01*
7$,+'0 7$(0 710,)&0 7$,+'0 7$(0 71%,'0% 7%$ 7%',011
7*,+11 '%1 7*,'$0 7*,+11 '%1 710,$%) 0 71(,'1)
"ro+lems3 90? 1 90J5 Cru$uay:s Current )ccount0
)ssumptions (millions o! CS dollars KoodsE e-ports DessE KoodsE i ports Balance on $oods Ser6icesE credit DessE Ser6icesE de0it Balance on services Inco eE credit DessE Inco eE de0it Balance on income .urrent transfersE credit DessE .urrent transfersE de0it Balance on current trans!ers Solution5
1JJG %,&%$ ',)01 1EE8 1,'1$ &&* ;9? )0& &0) 11JG +( 1) ?J
1JJJ %,%$1 ',1&+ 1GJ@ 1 ,%)% &0% ;@0 +') &+$ 11;9 +& ( E9
8000 %,'&0 ','1) 1J9@ 1,'(* $00 ;?; +)1 $'+ 11E@ +1 ( @@
2uestions 1JJG 1JJJ '1( What is Uru@uay2s 0alance on @oods3 7++% 7&$) '1) What is Uru@uay2s 0alance on ser6ices3 *'( *)0 '1+ What is Uru@uay2s 0alance on @oods and ser6ices3 7''+ 7*') 90G =hat is Cru$uay:s +alance on $oods. services and income>
8000 7$') *(* 7*&%
Uddin !ra"#ai
'0
Solution Manual
,ddE Balance on @oods 7++% Balance on ser6ices *'( Balance on inco e 71$& Total 7('( 90J =hat is Cru$uay:s current account +alance>
,ddE Balance on @oods Balance on ser6ices Balance on inco e Balance on current transfers Cru$uay:s CA) +alance
7&$) *)0 71*' 7(+$ 7&$) *)0 71*' +' 1?0@
7$') *(* 71+) 7)(& 7$') *(* 71+) )) 1?J8
7++% *'( 71$& ($ 1;E@
"ro+lems39010 1 90195 Myanmar:s Balance o! "ayments )ssumptions (millions o! CS dollars ,1 .urrent account 0alance B1 .apital account 0alance .1 Financial account 0alance 51 Jet errors and o issions E1 8eser6es and related ite s Solution5 2uestions '110 Is Myan ar e-periencin@ a net capital infloB :;< or outfloB :7<3 '111 What is Myan ar2s Total for Kroups , and B3 : ,;B< '11% What is Myan ar2s Total for Kroups , throu@h .3 : ,;B;.< '11' What is Myan ar2s Total for Kroups , throu@h 53 : ,;B;.;5< 1JJG ('(11 WinfloBX 7*$*1% *01$ ($1+ 1JJJ 8000 %*&1& 1)011 WinfloBX WinfloBX 7%&11$ 7''11 7*(1* 7%*' 7&%1$ 7%'1' 1JJG 7*$*1% 0 ?9?01 1&1& 7($1+ 1JJJ 7%&11$ 0 8;G0G 71%1' *(1* 8000 7%*' 0 1@001 ($1) %'1'
Uddin !ra"#ai
'1
Solution Manual
"ro+lems3 901; 1 9080 )r$entina:s Balance o! "ayments

"ro+lems 901; 1 9080 )r$entina:s Balance o! "ayments
)ssumptions (millions o! CS dollars )0 Current )ccount KoodsE e-ports DessE KoodsE i ports Balance on $oods Ser6icesE credit Ser6icesE de0it Balance on services Inco eE credit Inco eE de0it Balance on income .urrent transfersE credit .urrent transfersE de0it Balance on current trans!ers Current )ccount Balance (Group ) B0 Capital )ccount (Group B C0 Financial )ccount 5irect in6est ent in ,r@entina DessE 5irect in6est ent a0road 'irect investment in )r$entina. net Portfolio in6est ent assets, net Portfolio in6est ent lia0ilities, net Balance on other in6est ent assets I lia0ilities, net '0 <et Errors and #missions E0 (eserves and (elated Items
1JJG %),*'' %$,('% 19.0JJ *,)1& $,1%+ 1;.?0J ),1%1 1',('+ 1E.;1@ +11 '1' 9JG 11;.@8@ E9 +,%$% %,'%) ;.J@@ 71,$0( 10,)$' (,%1+ 198G 1;.0J0
1JJJ %','0$ %*,10' 1EJ; *,**) &,)01 1;.1?? ),0&( 1',((+ 1E.;E8 )&& '0) 9G8 118.09J GG %',$&* 1,'(* 88.@90 7%,1%$ 7*,+&% 71,0%) 1E8J 18.019
8000 %),*0$ %',&(1 8.??G *,(') &,&+1 1;.99? +,'$+ 1*,&+$ 1E.;G8 )*1 '(% 8GJ 1G.JE0 GE 11,))( 1,11' 10.??8 71,0)0 71,''% 7(0 1;09 1.1E@
Uddin !ra"#ai
'%
Solution Manual
Solution5 2uestions
1JJG
1JJJ
8000
901; =hat is )r$entina:s +alance on $oods and services> Balance on @oods Balance on ser6ices Total 7',0$$ 7*,(0$ 1E.@0G 7+$* 7*,1(( 1;.J;J %,((& 7*,''( 11.EEE
901? =hat is )r$entina:s current account +alance> Balance on @oods Balance on ser6ices Balance on inco e Balance on current transfers Total 901@ =hat seems to have +een the primary driver in )r$entinaQs current account +alance> 7',0$$ 7*,(0$ 7+,*1) '$& 11;.@8@ inco e de0it 7+,*1) 7+$* 7*,1(( 7+,*+% '&% 118.09J Inco e de0it 7+,*+% %,((& 7*,''( 7+,*&% %&$ 1G.JE0 inco e de0it 7+,*&%
901E =hat is )r$entina:s !inancial account +alance> )dd5 5irect in6est ent in ,r@entina, net Portfolio in6est ent assets, net Portfolio in6est ent lia0ilities, net Balance on other in6est ent assets I lia0ilities, net Total *,$)) 71,$0( 10,)$' (,%1+ 1G.JE1 %%,)'0 7%,1%$ 7*,+&% 71,0%) 1;.@J9 10,((% 71,0)0 71,''% 7(0 G.110
Uddin !ra"#ai
''
Solution Manual
901G =hat is )r$entina:s Total !or Groups ) throu$h C> .urrent ,ccount Balance :Kroup ,< .apital ,ccount :Kroup B< Financial ,ccount : Kroup .< Total 71*,)%) +' 1&,$+1 ;.;1G 71%,0'$ && 1*,)$' 8.E;8 7&,$+0 &+ &,110 1EE9
901J =hat is )r$entina:s Total !or Groups ) throu$h '> .urrent ,ccount Balance :Kroup ,< .apital ,ccount :Kroup B< Financial ,ccount : Kroup .< Jet Errors and ! issions Total 71*,)%) +' 1&,$+1 7'%& ;.0J0 71%,0'$ && 1*,)$' 7+%$ 8.019 7&,$+0 &+ &,110 7*0' 11.1E@
9080 Cnless the !inancial account could $ro/ a very lar$e0 Oes, the financial account could @roB a 6ery lar@e as the a ount is consider as surplus I a crisis Bill ensue1
)r$entina:s !inancial account +alance> )dd55irect in6est ent in ,r@entina, net Portfolio in6est ent assets, net Portfolio in6est ent lia0ilities, net Balance on other in6est ent assets I lia0ilities, net Total *,$)) 71,$0( 10,)$' (,%1+ 1G.JE1 %%,)'0 7%,1%$ 7*,+&% 71,0%) 1;.@J9 10,((% 71,0)0 71,''% 7(0 G.110
Uddin !ra"#ai
'*
Solution Manual
Chapter-4 Forei n !"chan e #ar$et %F!#)
Uddin !ra"#ai
'(
Solution Manual
Chapter 3 ;
,Forei$n E%chan$e Mar&ets4
"ro+lem3;015 (in$$it up or do/n> Before the ,sian currency crises the Malaysian rin@@it traded at 8M % 1+000 =41 It currently traded at 8M '1&000 =41 5id the rin@@it appreciate or depreciate I 0y Bhat percenta@e3 Solution5 Given 'ata Malaysian rin@@it, 0efore the crisis 9 8M % 1+000 =41 Malaysian rin@@it, after the crisis 9 8M '1&000 =41 Calculation5 We use indirect ?uotation for ula for findin@ percenta@e chan@e1
Uddin !ra"#ai
')
Solution Manual
(echec&in$ Method5 We use direct ?uotation for ula for findin@ percenta@e chan@e1
Uddin !ra"#ai
'+
Solution Manual
"ro+lem3;085 For/ard "remium & 'iscounts0 Spot I 1&07day forBard e-chan@e rate for se6eral aYor currencies folloB1 For each pair, calculate the percenta@e pre iu or discounts e-pressed as an annual rate1 2uoted spot rate 1G01days !or/ard rate
.urrencies European euro British pound Capanese yen SBiss franc Aon@ Kon@ dollar
Spot 8ate 4 01&000= L 411()%=R Z 1%0100= 4 SF 11)000= 4 AK4 &10000=4
ForBard 8ate 401&1)00=L 411('00=R Z11&100=4 SF11)%00=4 AK4+1&000=4
Uddin !ra"#ai
'&
Solution Manual
Uddin !ra"#ai
'$
Solution Manual
Uddin !ra"#ai
*0
Solution Manual
Summary5 2uoted Spot rate 1G01day For/ard rate 1&0 5irect 5irect Indirect Indirect Indirect 01&000 11()%0 1%0100 11)000 &10000 01&1)0 11('00 11&100 11)%00 +1&000 ; *10000> 7 *10$+'> ; '1'&$&> 7 %1*)$1> ; (11%&%> Pre iu 5iscount Pre iu 5iscount Pre iu "ercent premium or discount per annum
)ssumptions 5ays forBard European euro :4=euro< British pound :4=pound< Capanese yen :yen=4< SBiss franc :SF=4< Aon@ Kon@ dollar :AK4=4<
2uotation
"remium or 'iscount
Uddin !ra"#ai
*1
Solution Manual
"ro+lem3;095 Tradin$ in S/it7erland0 Solution5 Oou recei6e the folloBin@ ?uotes for SBiss francs a@ainst the dollar for spot, one7 onth forBard, '7 onths forBard, and ) onths forBard1 .alculate the outri@ht ?uotes1 )ssumptions Spot e%chan$e rate5 Bid rate :SF=4< ,s" rate :SF=4 !ne7 onth forBard '7 onths forBard )7 onths forBard Mid 8ate 9 11)0+( ; 11)0&( = % 9 11)0& Spread 9 11)0&( [ 11)0+( 9 01001 6alues 11)0+( 11)0&( 10 to 1( 1* to %% %0 to '0
0< =hat do you notice a+out the spread as *uotes moves !rom si% months
!or/ard> =hy do you this occurs> It Bidens, ost li"ely a result of thinner and thinner tradin@ 6olu e1
Uddin !ra"#ai
*%
Solution Manual
"ro+lem3 ;0;5 Men For/ard "remium0 Usin@ the id rate yen ?uotes in E-hi0it *1(E Solution5 Calculate the !or/ard premiums !or the yen in E%hi+it ;0?0 Implied a RAF RAF SMid 'ays Calculated Bid (ate )s& (ate (ates For/ard SSFor/ard Terms (spot (!or/ard (RAF TnQ "remium Spot 1 Bee" 1 % Cash (ates ' * ( ) $ onth onths onths onths onths onths onths 1 year % year S/ap (ates ' year * year ( year 11G08E 710 7(1 7$( 71*' 7 1$( 7 %*0 7%&& 7*'( 7(&* 711(0 71+*& 7%1&( 7%($% 11G09E 7$ 7(0 7$' 71*0 71$0 7%'+ 7%&+ 7*%$ 7(&1 711%$ 71)$& 7%11( 7%*$0 11G098 11&1%' 11+1&% 11+1'& 11)1$1 11)1*0 11(1$* 11(1*( 11*100 11%1(0 10)1$' 10110$ $)1&% $%1$1 + '0 )0 $0 1%0 1(0 1&0 %+0 ')0 +%0 1,0&0 1,**0 1,&00 '1$1*$> (10$%(> *1&0*$> *1&%*%> *1$*&(> *1$%)+> *1$+1&> (10(%)> (11+''> (1'%($> (1)&1*> (1((1(> (1*)$&>
Uddin !ra"#ai
*'
Solution Manual
F Mid rate 9 Bid ; ,s" = % FF ForBard Pre iu 9 :S [ F = F< - :')0 = n< - 100
:Indirect Puotation<
+ E%plain ho/ the !or/ard perineum o! discount chan$es as maturities $ets lon$er> The pre iu is @radually @ettin@ lar@er as the aturity len@thens to one year1 ,fter one year it see in@ly sta0ili#es at a0out (1(> to (1)>1 The forBard rates pro@ressi6ely re?uire feBer and feBer Capanese yen per dollar than the current spot rate1 Therefore the yen is sellin@ forBard at a pre iu and the dollar is sellin@ forBard at a discount1 The %* onth forBard rate has the s allest pre iu , Bhile the 1 onth forBard possesses the lar@est pre iu 1 "ro+lem 3;0?5 Euro For/ard "remium0 Usin@ the id rate euros ?uotes in E-hi0it *1(E Solution5 Calculate the !or/ard premiums !or the euro in E%hi+it ;0?0 Implied a FAI FAI SMid 'ays Calculated Bid (ate )s& (ate (ates For/ard SSFor/ard Terms (spot (!or/ard FAI TnQ "remium Spot 1 Bee" 1 Cash (ates % ' * ( ) $ onth onths onths onths onths onths onths 1 year 110&$+ ' 1+ '( (' +% $0 11% 1+( %*% 110$01 * 1$ ') (* +) $( 11' 1++ %*( 110&$$ 110$0' 110$1+ 110$'* 110$(' 110$+' 110$$% 11101% 1110+( + '0 )0 $0 1%0 1(0 1&0 %+0 11&&+(> 11$&1&> 11$%)&> 11$&1&> %10')$> %10*+$> %10+')> %11('1> %1%'&+>
Uddin !ra"#ai
**
Solution Manual
1111*' % year S/ap (ates ' year * year ( year *&1 +(0 $)0 1,1%$ (%% &10 1,0'$ 1,%+) 111*01 111)+$ 111&$$ 11%10%
')0 +%0 1,0&0 1,**0 1,&00 %1'0'0> %1'&((> %1%$'&> %1%0+(>
F Mid rate 9 Bid ; ,s" = % FF ForBard Pre iu 9 :F7 S = S< - :')0 = n< - 100
:5irect Puotation<
+ 0 E%plain ho/ the !or/ard perineum o! discount chan$es as maturities $ets lon$er> The pre iu is @ettin@ lar@er, 0ut then di inishes so eBhat for years * and (1 "ro+lem3 ;0@5 Travelin$5 Copenha$en to St0 "eters+ur$0 !n your post7@raduation cele0ratory trip you are lea6in@ .openha@en, 5en ar" for St1 Peters0ur@, 8ussia1 5en ar"Vs currency is the "rone :5en ar", althou@h an EU e 0er, is not a participant in the euro itself, 0ut rather aintains a ana@ed rate a@ainst the euro1<Oou lea6e .openha@en Bith 10,000 5anish "roner still in your Ballet1 Wantin@ to e-chan@e all of these for 8ussian ru0les, you o0tain the folloBin@ ?uotes1 Solution5 )ssumptions 6alues Be@innin@ your trip Bith 5anish "rone 5Kr 10,000100 Spot rate :5"r=4< 5Kr &1((1( = 4 Spot rate :8u0le=4< 8u0le '01$)%= 4
Uddin !ra"#ai
*(
Solution Manual
"ro+lem3;0E5 (is&less "ro!it on the Franc0 The folloBin@ e-chan@e rates are a6aila0le to you1 :Oou can 0uy or sell at the stated rates1< )ssumptions Be@innin@ funds in SBiss francs :SF< Mt1 FuYi Ban" :yen=4< Mt1 8ush ore Ban" :SF=4< Matterhorn Ban" :yen=SF< Solution5 6alues 10,000,000100 Z1%0100 =4 SF11)000 =4 Z &0100 = SF or SF 0101%(
Uddin !ra"#ai
*)
Solution Manual
Uddin !ra"#ai
*+
Solution Manual
"ro+lem3 ;0G5 Trans )tlantic )r+itra$e0 , corporate treasury Bith operations in JeB Oor" si ultaneously calls .iti0an" in id7toBn JeB Oor" .ity and Barclays in Dondon1 The tBo 0an"s @i6e the folloBin@ ?uotes at the sa e ti e on the euro1 Citi+an& <MC *uotes H F 00J@?0 U E0 A I Barclays -ondon *uotes H F 00J@;0 U @0 A I E-plain, usin@ 41 illion or its euro e?ui6alent, hoB the corporate treasury could a"e @eo@raphic ar0itra@e profit Bith the tBo different e-chan@e rates ?uotes1 Solution5 Given 'ata Be@innin@ funds 9 S0<o0 Bid :Buyin@< ,s" :sellin@ < 41,000,000100 Citi+an& <MC *uotes5 F00J@?0 A I 401$)+0 =L Barclays -ondon *uotes5 401$)*0 = L F00J@@0 A I
Uddin !ra"#ai
*&
Solution Manual
"ro+lem3 ;0J5 =all Street Nournal *uotes and premiums0 .alculate the percenta@e pre iu or discount fro the data in E-hi0it *1)1 Solution5 E%hi+it ;0@0 CSF CSF e*uivalent e*uivalent V A CSF V A CSF )ssumptions Thu =ed Thu =ed Britain :Pound< 17 onth forBard : nH90days< '7 onths forBard : nHJ0days< )7 onths forBard : nH1G0days< 11***' 11**1& 11 *'+1 11*'01 11**01 11*' ') 01)$(& 01 )$$' 01)$+( 01)$** 11**+( 11**(% 01)$%* 01)$') 01)$0& 01)$1$
Uddin !ra"#ai
*$
Solution Manual
a<
For/ard premium (discount 0 To calculate the forBard pre iu Bhich is @i6en as underH > pre iu
or discount for 4=R, Be use direct ?uotation for ula,
or discount 9 :F7S< = :S< - :')0= n< - 100
To calculate the forBard pre iu or discount for R=4, Be use indirect ?uotation for ula, Bhich is @i6en as underH > pre iu or discount 9 :S7F< = :F< - :')0 = n< - 100 For/ard premium (discount CSF CSF e*uivalent e*uivalent "oundACSF "oundACSF )ssumptions Thu =ed Thu =ed 17 onth forBard 1800EE1L 110J0@EL 1800E@1L 110J0EGL '7 onths forBard 110JJ;0L 1800;;JL 110J?;@L 1800E9EL )7 onths forBard 110J@@;L 110J80@L 110JE9;L 110J811L + =hy are the !or/ard discounts not identical> Oes, the forBard discounts of dollar I pounds are not identical1 They Bould 0e if the QR=4Q ?uote is calculated as the reciprocal of QUS4 e?ui6alentQ carryin@ the di@its1 "ro+lem3;0105 Finanial Times *uotes0 Solution5 Usin@ the spot and forBard ?uotes on the British pound in E-hi0it *1( in the chapter, de onstrate hoB the Financial Ti es is calculatin@ the forBard pre iu s on theE !ne onth forBard rate Three onths forBard rate !ne year forBard rate From E%hi+it ;0? Spot rate, closin@ id7point !ne onth forBard rate > P, :per annu < Three onths forBard rate > P, :per annu < !ne year forBard rate 6alues 411***) = R 11**%1 %11> 11*'+* %10> 11*1&'
Uddin !ra"#ai
(0
Solution Manual
> P, :per annu <
11&>
'irect *uotation !ormula is used !or calculatin$ the !or/ard premium5 :F7S<=:S< - :')0 = n< - 100 !ne onth rate :n9'0<1 Three onths rate :n9$0<1 !ne year rate :n91&0<1 %10+)+> 11$$')> 11&%0)>
<ote1 These pre iu s are all actually Qne@ati6eQ in the precise calculation for ula, 0ut are reported as positi6es in Financial Ti es ?uotes1 "ro+lem3 ;0115 6ene7uelan Bolivar () Solution5 The Gene#uelan @o6ern ent officially floated the Gene#uelan 0oli6ar :Bs< in Fe0ruary %00%1 Within Bee"s, its 6alue had o6ed fro the pre7float fi- of BS++&=4 to Bs10%(=41 Be@innin@ rate 9 S19 Bs ++& = 4 Endin@ rate 9 S% 9 Bs 1,0%( = 4 a Is this a devaluation or depreciation> This is a case in Bhich a @o6ern ent has chan@ed its currency fro a @o6ern entally deter ined fi-ed rate, to a re@i e in Bhich the currency is alloBed to chan@e in 6alue 0ased on supply and de and forces in the ar"et1 ,s a result of the o6e, the currency2s 6alue in this case Bas WdepreciationX a@ainst the U1S1 dollar1 + By /hat percenta$e did its value chan$e> We use indirect ?uotation for ula for percenta@e chan@eE
Uddin !ra"#ai
(1
Solution Manual
"ro+lem3 ;0185 6ene7uelan Bolivar (B 0 The Gene#uelan political and econo ic crisis deepened in late %00% and early %00'1 !n Canuary 1st, %00', the 0oli6ar Bas tradin@ at Bs1*00=41 By Fe0ruary 1st, its 6alue had fallen to Bs1$(0=41 Many currency analysts and forecasters Bere predictin@ that the 0oli6ar Bould fall an additional *0> fro its Fe0ruary 1st 6alue 0y early su er %00'1 Solution5 Given 'ata E-chan@e rate, Canuary 1, %00' 9 Bs 1,*00 = 4 E-chan@e rate, Fe0ruary 1, %00' 9 Bs 1,$(0 = 4 Forecast fall in 6alue fro Fe0 1 to early su er, %00' 9 7 *010> a =hat /as the percenta$e chan$e in Nanuary> Calculation5
Uddin !ra"#ai
(%
Solution Manual
+ Forecast value !or Nune 8009>
Uddin !ra"#ai
('
Solution Manual
Uddin !ra"#ai
(*
Solution Manual
"ro+lem3 ;0195 Indirect 2uotation on the 'ollar Solution5 Given 'ata Puoted Spot rate 9 L 110%00=4 $07day ForBard rate 9 L 110'00=4 5ays forBard 9 $07day Calculation5
The euro Bould 0e sellin@ forBard at a pre iu a@ainst the dollar, or e?ui6alently, the dollar sellin@ forBard a@ainst the euro at a discount1 In a Bay, the ter inolo@y is a 0it tric"y1 !ne i@ht say that the QforBard pre iu is a pre iu 1Q (echec&in$ Method5 !ne Bay to chec" percenta@e chan@e calculations is to in6ert each of the currency ?uotes :1 N L=4 <, and recalculate the ?uote usin@ the direct ?uotation for ula1
Uddin !ra"#ai
((
Solution Manual
Bence. rechec&ed "ro+lem3;01;5 'irect 2uotation on the 'ollar Solution5 Puoted Spot rate 9 4 11((00 = R )7 onth ForBard rate 9 4 11()00 = R 5ays forBard 9 1&07day Calculation5
Uddin !ra"#ai
()
Solution Manual
The forBard rate re?uires feBer US dollars in e-chan@e for pounds than the current spot rate1 The dollar is therefore sellin@ forBard at a pre iu a@ainst the pound I the pound is si ultaneously sellin@ forBard at a discount 6ersus the US dollar1 Chec&in$ Method5 !ne Bay to chec" percenta@e chan@e calculations is to in6ert each of the currency ?uotes :1 N 4=R<, and recalculate the ?uote usin@ the indirect ?uotation for ula1
Uddin !ra"#ai
(+
Solution Manual
"ro+lem3 ;01?5 Me%ican "eso 1 European Euro Cross (ates0 Ki6en the folloBin@ tBo e-chan@e ratesE Me-ican peso PsE Ps101%0 = 4 Euro LE I L 110% = 41 .alculate the cross rate 0etBeen the Me-ican peso :Ps< and the euro :L<1 Solution5 .alculationsE
Uddin !ra"#ai
(&
Solution Manual
"ro+lem3 ;01@5 )round the Born0 ,ssu in@ the folloBin@ ?uotes, calculate hoB a ar"et trader at .iti0an" Bith 41,000,000 can a"e an inter7 ar"et ar0itra@e profit1 )ssumptions .iti0an" ?uoteE :4=R< Jational West inster ?uoteE :L=R< 5eutsche0an" ?uoteE :4=L< Initial in6est ent Solution5 E%chan$e rate 4 11(*00 = R L 11)000 = R or 4 01$+00 = L 4 1,000,000100
R 01)%(0 = L
Uddin !ra"#ai
($
Solution Manual
Uddin !ra"#ai
)0
Solution Manual
Chapter 3 ? Forei$n Currency 'erivatives
Uddin !ra"#ai
)1
Solution Manual
Chapter 3 ?
,Forei$n Currency 'erivatives4
a1 01 c1
"ro+lem3?015 "eso Futures0 , 0er Mc.lain, the currency speculator Be et earlier in the chapter, sells ei@ht Cune futures contracts for (00,000 pesos at the closin@ price ?uoted in E-hi0it (111 What is the 6alue of her position at aturity if the endin@ spot rate is4011%000=Ps3 What is the 6alue of her position at aturity if the endin@ spot rate is 4010$&00=Ps3 What is the 6alue of her position at aturity if the endin@ spot rate is 40111000=Ps3 Solution5 a + c )ssumptions 6alues 6alues 6alues Ju 0er of pesos per futures contract (00,000 (00,000 (00,000 Ju 0er of contracts & & & Buy or sell the peso futures3 Sell Sell Sell Endin@ spot rate 4011% = Ps 40110 = Ps 40111 = Ps Cune futures settle price fro E-hi0it (11 :4= Ps< JoteE Short Position Bill @ain if spot price fall 0eloB future price 40111 40111 40111
Uddin !ra"#ai
)%
Solution Manual
Interpretation5 , 0er 0uys at the spot price and sells at the futures price1 If the futures price is @reater than the endin@ spot price, she a"es a profit otherBise she a"es loss1 "ro+lem3 ?085 "ounds Futures0 Michael Palin, a currency trader for a JeB Oor" in6est ent fir , uses the folloBin@ futures ?uotes on the British pound to speculate on the 6alue of the British pound1 a0 If he 0uys ( Cune pound futures, and the spot rate at aturity is 411'$&0=pound, Bhat is the 6alue of his position3 +0 If he sells 1% March pound futures, and the spot rate at aturity is 411*()0=pound, Bhat is the 6alue of his position3 c0 If he 0uys ' March pound futures, and the spot rate at aturity is 411*()0=pound, Bhat is the 6alue of his position3 d0 If he sells 1% Cune pound futures, and the spot rate at aturity is 411'$&0=pound, Bhat is the 6alue of his position3
&ritish 'o(n) F(t(res* +,-.po(n) %C#!) #at(rit1 #arch 8(ne 2pen 1.$2$* 1.$1* 4o5 1.$2 1.$2*8 1$ 1.$188 1.$1$* 3i h ,ettle 174228 174162 Chan e #.##32 #.##3# Contract / 62*5000 2pen 3i h 6nterest 2 1.$0# &G*#& 1.$&& 8#9
Solution5 )ssumptions Ju 0er of pounds :\< per futures contract Maturity onth Ju 0er of contracts Given condition in *uestion0 Endin@ spot rate :4=\< Pound futures contract, settle price :@i6en in ta0le < Spot [ Future ,nalysis of spot I futures rate a Galues R)%,(00 Cune ( +uys 411'$1&0=\ 411*1)%=\ 4 :0101&%< S]F + Galues R)%,(00 March 1% sells 411*()0=\ c Galues R)%,(00 March ' +uys 411*()0=\ d Galues R)%,(00 Cune 1% sells 411'$1&0=\ 411*1)%=\ 4 :0101&%< S]F
M1.$228+\ M1.$228+\ M #.#332 M#.#332
SN6
SN6
Uddin !ra"#ai
)'
Solution Manual
"ro+lem3?095 Bans Schmidt. euro Speculator0 Aans is once a@ain speculatin@ on the o6e ent of currencies1 Aans has 410 illion to 0e@in Bith, and he ust state all profits at the end of any speculation in U1S1 dollars1 The spot rate on the euro is 401&&(0=L, Bhile the '07day forBard rate is 401$000=L1 a0 If Aans 0elie6es the euro Bill continue to slide in 6alue a@ainst the U1S1 dollar, so that he e-pects the spot rate to 0e 401&**0=L at the end of '0 days, Bhat should he do3 +0 If Aans 0elie6es the euro Bill appreciate in 6alue a@ainst the U1S1 dollar, so that he e-pects the spot rate to 0e 401$**0=L at the end of '0 days, Bhat should he do3
Uddin !ra"#ai
)*
Solution Manual
Solution5
Uddin !ra"#ai
)(
Solution Manual
"ro+lem3 ?0;5 Bans Schmidt. S/iss !ranc Speculator0 Si ilar to the situation Aans saB in the chapter, Aans 0elie6es the SBiss franc Bill appreciate 6ersus the U1S1 dollar in the co in@ three7 onth period1 Ae has 4100,000 to in6est1 The current spot rate is 401(&%0=SF, the three7 onth forBard rate is 401()*0=SF, and he e-pects the spot rates to reach 401)%(0=SF in three onths1
Uddin !ra"#ai
))
Solution Manual
a0 .alculate AansV e-pected profit assu in@ a pure spot ar"et speculation strate@y1 +0 .alculate AansV e-pected profit assu in@ he 0uys or sells SF three onths forBard1 Solution5 Bans Schmidt uses F100.000 to speculate on the S/iss !ranc0 )ssumptions Initial in6est ent :funds a6aila0le< .urrent spot rate :4=SF< Si-7 onth forBard rate :4=SF< E-pected spot rate in si- onths :4=SF< "art (a "art (+ 6alues 6alues 4100,000 4100,000 4 01(&%0 = SF 4 01(&%0 = SF 4 01()*0 = SF 4 01()*0 = SF 4 01)%(0 = SF 4 01)%(0 = SF
Uddin !ra"#ai
)+
Solution Manual
Uddin !ra"#ai
)&
Solution Manual
Uddin !ra"#ai
)$
Solution Manual
"ro+lem3 ?0?5 Watya & the yen0 Watya Bere#o6s"y Bor"s in the currency tradin@ unit of Su ara Wor"ers Ban" in To@liatti, 8ussia1 Aer latest speculati6e position is to profit fro her e-pectation that the U1S1 dollar Bill rise si@nificantly a@ainst the Capanese yen1 The current spot rate is Z1%0100=41 She ust choose 0etBeen the folloBin@ $07day options on the Capanese yenE Option Stri&e price "remium
Put on yen .all on yen a + Z1%(=4 Z1%(=4 4010000'=Z 401000*)=Z
Should Katya 0uy a call on yen or a put on yen3 Usin@ your ansBer in part a, Bhat is KatyaVs 0rea" e6en price3
Uddin !ra"#ai
+0
Solution Manual
What is KatyaVs @ross profit and net profit :includin@ pre iu < if the endin@ spot rate is 1*0 Z=43 Given 'ata
.urrent spot rate 9 E-pected endin@ spot rate in $0 days 9 Maturity of option 9 Stri"e price on Put on Oen 9 Stri"e price on call on Oen 9 Pre iu on Put on Oen 9 Pre iu on call on Oen 9
Z 1%0=4 Z 1*0=4 $0 days R18?AF R18?AF '','''=4 %,1+*
or or
40100&''=Z 40100+1*=Z
or 40100&00=Z or 40100&00=Z or F0000009AR or F00000;@AR
Solution5 a )ns0 Katya should +uy a put on yen to profit fro the rise of the dollar :the fall of the yen<1 Katetya should 0uy a put on yen 0ecause the stri"e rate is @reater then the spot rate1 Stri"e rate M Spot rate Z1%(=4 M Z 1%0=4 + 0 Usin@ your ansBer in part a, Bhat is KatyaVs 0rea" e6en price3 )ns0 Katya 0uys a put on yen1 She pays pre iu today1 In $0 days, to e-ercises the put, recei6in@ US dollar1 :<ote5 We ta"e 6alues in ter s of 4=Z to find Brea" e6en point, Kross profit I Jet profit< HX Brea& Even "rice H Stri&e "rice on put on Men 1 "remium Brea" E6en Price 9 40100&00=Z 1 4010000'=Z Brea" E6en Price 9 40100+$+=Z c0 )ns0 What is KatyaVs @ross profit and net profit :includin@ pre iu < if the endin@ spot rate is Z1*0 =43 HX Gross "ro!it H Stri&e "rice U Endin$ spot rate
Kross Profit 9 40100&00=Z Kross Profit 9 401000&)=Z HX <et "ro!it H Jet Profit 9
1 40100+1*=Z
Stri&e "rice [ Endin$ spot rate [ "remium 40100&00=Z [ 40100+1*=Z [ 4010000'=Z
Uddin !ra"#ai
+1
Solution Manual
Jet Profit Jet Profit
9 9
40100&00=Z [ 40100+1+=Z 4 01000&'=Z
"ro+lem3 ?0@5 SamuelQs +et0 Sa uel Sa osir of Pere@rine In6est ents in Ca"arta, Indonesia, focuses nearly all of his ti e and attention on the U1S1 dollar=Sin@apore dollar :4=S4< cross7rate1 The current spot rate is 401)000=S41 ,fter considera0le study this Bee", he has concluded that the Sin@apore dollar Bill appreciate 6ersus the U1S1 dollar in the co in@ $0 days, pro0a0ly to a0out 401+000=S41 Ae has the folloBin@ options on the Sin@apore dollar to choose for E
Option
Put on S4 .all on S4
Stri&e price 401)(00=S4 401)(00=S4
"remium 4010000'=S4 401000*)=S4
a 0 Should Sa uel 0uy a put on Sin@apore dollar or call on Sin@apore dollar3 + 0 Usin@ your ansBer in part a, Bhat is Sa uelVs 0rea" e6en price3 c 0 Usin@ your ansBer in part a, Bhat is Sa uelVs @ross profit and net profit :includin@ pre iu < if the endin@ spot rate at the end of $0 days is 401+000=S43 d 0 Usin@ your ansBer in part a, Bhat is Sa uelVs @ross profit and net profit :includin@ pre iu < if the endin@ spot rate at the end of $0 days is indeed 401&000=S43 Given 'ata .urrent spot rate 9 401)000=S4 or S411)))+=4 E-pected endin@ spot rate in $0 days 9 401+000=S4 or S411*%&)=4 Maturity of option 9 $0 days Stri"e price on Put on Oen 9 401)(00=S4 or S411('&(=S Stri"e price on .all on Oen 9 401)(00=S4 or S411('&(=S Pre iu on Put on Oen 9 4010000'=S4 Pre iu on call on Oen 9 401000*)=S4 Solution5 a 0 Should Sa uel 0uy a put on Sin@apore dollar or call on Sin@apore dollar3 )ns0 Sa uel should +uy a call on Sin$apore dollar to appreciate 6ersus the US dollar1 Sa uel should 0uy a put on yen 0ecause the stri"e rate is loBer then the spot rate1 In this case spot rate is @reater then the Stri"e rate1 Spot rate M Stri"e rate S411)))+=4 M S411('&(=S + 0 )ns0 HX Brea& Even "rice H Stri&e "rice on Call on SF O "remium Brea" E6en Price 9 401)(00=S4 ; 01000*)=S4 Brea" E6en Price 9 401)(0*)=S4
Uddin !ra"#ai
+%
Solution Manual
c0
)ns0 HX Gross "ro!it H Endin$ Spot (ate
1 Stri&e "rice 1
Stri&e "rice [ "remium
Kross Profit 9 401+000=S4 1 401)(00=S4 Kross Profit 9 4010(000=S4 HX <et "ro!it Jet Profit Jet Profit Jet Profit d0 )ns0 HX Gross "ro!it H Endin$ Spot (ate H Endin$ Spot (ate 9 401+000=S4 1 401)(00=S4 [ 01000*)=S4 9 401+000=S4 [ 4)(0*)=S4 9 4010*$(*=S4
1 Stri&e "rice
Kross Profit 9 401&000=S4 1 401)(00=S4 Kross Profit 9 4011(000=S4 HX <et "ro!it Jet Profit Jet Profit Jet Profit H Endin$ Spot (ate
9 401&000=S4 1 401)(00=S4 [ 01000*)=S4 9 401&000=S4 [ 4)(0*)=S4 9 4011*$(*=S4
"ro+lem3 ?0E5 Bo/ much pro!it U calls> assu e a call option on euros is Britten Bith a stri"e price of 401$*00= L at a pre iu of 01$0000.ents per euro :40100$0=L< and Bith an e-piration date three onths fro noB1 The option is for L 100,0001 .alculate your profit or loss if you e-ercise 0efore aturity at a ti e Bhen the euro is traded spot atE a< 401$000=L 0< 4110000=L c< 4110%00=L d< 401$&00=L e< 401$%00=L f< 401$*00=L
Uddin !ra"#ai
+'
Solution Manual
@< 401$)00=L
) call option is /ritten on euros0 a + c d e ! 6alues 6alues 6alues 6alues 6alues 6alues
100000 $0 401$* 40101 401$0 47 70100$ :40101< :4$00< 100000 $0 401$* 40101 401$% 47 70100$ :40101< :4$00< 100000 $0 401$* 40101 401$* 47 70100$ :40101< :4$001< 100000 $0 401$* 40101 401$) 4010% 70100$ 40101 41,100 100000 $0 401$* 40101 401$& 4010* 70100$ 4010' 4',100 100000 $0 401$* 40101 41100 4010) 70100$ 4010( 4(,100
)ssumptions
Jotional principal :euros< Maturity :days< Stri"e price :US4=euro< Pre iu :US4=euro< Endin@ spot rate :US4=euro< Kross profit on option Dess pre iu Jet profit :US4=euro< Jet profit, total
$ 6alues
100000 $0 401$* 40101 4110% 4010& 70100$ 4010+ 4+,100
"ro+lem3 ?0G5 Bo/ much pro!it U puts> ,ssu e a put option on Capanese yen is Britten Bith a stri"e price of 40100&000Z :Z1%(100=4< at a pre iu of 0100&0cents per yen and Bith an e-piration date si- onths fro noB1 The option is for Z1%,(00,0001 .alculate your profit or loss if you e-ercise 0efore aturity at a ti e Bhen the yen is traded spot at a Z110=4 + Z11(=4 c Z1%0=4 d Z1%(=4 e Z1'0=4 ! Z1'(=4 $ Z1*0=4
Uddin !ra"#ai
+*
Solution Manual
Solution5 ) put option on yen is /ritten0
)ssumptions
Jotional principal :Z< Maturity :days< Stri"e price :4=Z< Pre iu :4=Z< Endin@ spot rate :Z=4< in US4=yen Kross profit Dess pre iu Jet profit :4=Z< Jet profit, total
a
1%,(00,000 1&0 40101 40100 110 40101 47 7010000& :40100< :41,000<
d
1%,(00,000 1&0 40101 40100 1%( 40101 47 7010000& :40100< :41,000<
$
1%,(00,000 1&0 40101 40100 1*0 40101 40100 7010000& 40100 4$,+1*1%$
1%,(00,000 1%,(00,000 1&0 1&0 40101 40101 40100 40100 11( 40101 47 7010000& :40100< :41,000< 1%0 40101 47 7010000& :40100< :41,000<
1%,(00,000 1%,(00,000 1&0 1&0 40101 40101 40100 40100 1'0 40101 40100 7010000& 40100 4%,&*)11( 1'( 40101 40100 7010000& 40100 4),*0+1*1
"ro+lem3 ?0J5 Fallin$ Canadian dollar00 Kiri Patel Bor"s for .IB. .urrency Funds in Toronto1 Kiri is so ethin@ of a contrarians 7 as opposed to ost of the forecasts, he 0elie6es the .anadian dollar :.4< Bill appreciate 6ersus the U1S1 dollar o6er the co in@ $0 days1 The current spot rate is 401)+(0=.41 Kiri ay choose 0etBeen the folloBin@ options on the .anadian dollarE
2ption Put on SM Call on SM ,tri$e price M#.0###+CM M#.0###+CM 're9i(9 M#.####3+CM M#.##2$9+CM
a 0 Should Kiri 0uy a put on .anadian dollars or call on Sin@apore dollars3 + 0 Usin@ your ansBer in part a, Bhat is KiriVs 0rea" e6en price3 c 0 Usin@ your ansBer in part a, Bhat is KiriVs @ross profit and net profit :includin@ pre iu < if the endin@ spot rate at the end of $0 days is indeed 401+)00=.43 d 0 Usin@ your ansBer in part a, Bhat is KiriVs @ross profit and net profit :includin@ pre iu < if the spot rate at the end of $0 days is indeed 401&%(0=.43
Uddin !ra"#ai
+(
Solution Manual
Solution5 Given 'ata .urrent spot rate Maturity of option Stri"e price on Put on Oen Stri"e price on .all on Oen Pre iu on Put on Oen Pre iu on call on Oen 9 9 9 9 9 9 401)+(0=.4 $0 days 401+000=.4 401+000=.4 4010000'=.4 40100%*$=.4 or .411*&1(=4 or .411*%&)=4 or .411*%&)=4
a 0 Since Kiri e-pects the .anadian dollar to appreciate 6ersus the US dollar, he should +uy a call on Canadian dollars1 Kiri should 0uy a call on .anadian dollar 0ecause the spot rate is @reater then the stri"e rate1 Spot rate M Stri"e rate .411*&1(=4 M .411*%&)=4 + 0 )ns0 HX Brea& Even "rice H Stri&e "rice on Call on SF O "remium Brea" E6en Price 9 401+0000=.4 ; 4010%*$=.4 Brea" E6en Price 9 401+%*$=.4 c 0 )ns0 HX Gross "ro!it H Endin$ Spot (ate Kross Profit 9 401+)00=.4 Kross Profit 9 4010)00=.4 HX <et "ro!it Jet Profit Jet Profit Jet Profit d 0 )ns0
1 Stri&e "rice
401+000=.4
H Endin$ Spot (ate
9 401+)00=.4 1 401+000=.4 [ 010%*$=.4 9 401+)00=.4 [ 401+%*$=.4 9 4010'(1=.4
Uddin !ra"#ai
+)
Solution Manual
HX Gross "ro!it H Endin$ Spot (ate Kross Profit 9 401&%(0=.4 Kross Profit 9 4011%(0=.4 HX <et "ro!it
1 Stri&e "rice
401+000=.4
H Endin$ Spot (ate
Jet Profit Jet Profit Jet Profit
9 401&%(0=.4 1 401+000=.4 [ 010%*$=.4 9 401&%(0=.4 [ 401+%*$=.4 9 4011001.4
"ro+lem3?0105 Braveheart:s "ut on "ounds0 ,ndy FurstoB is a speculator for a currency fund in Dondon na ed Bra6eheart1 Bra6eheartVs clients are a collection of Bealthy pri6ate in6estors Bho, Bith a ini u sta"e of V8?0.000 each, Bish to speculate on the o6e ent of currencies1 The in6estors e-pect annual returns in e-cess of %(>1 ,lthou@h officed in Dondon, all accounts and e-pectations are 0ased in U1S1 dollars1 ,ndy FurstoB is con6inced that the British pound Bill slide si@nificantly 77 possi0ly to F109800AV 77 in the co in@ '0 to )0 days1 The current spot rate is F10;8@0AV0 ,ndy Bishes to +uy a put on pounds Bhich Bill yield the %(> return e-pected 0y his in6estors1 Which of the folloBin@ put options Bould you reco end he purchase1 Pro6e your choice is the prefera0le co 0ination of stri"e price, aturity, and up7front pre iu e-pense1 Solution5 ,ndy FurstoB of Bra6eheart Bishes to speculate on the fall of the ponds:R<H7 Given 'ata .urrent spot rate 9 411*%)0 = \ :R 01+01%)%' = 4 < E-pected endin@s spot rate in '0 to )0 days 9 411'%00 =R :\01+(+(+(&= 4 < Potential in6est ent principal per person 9 R%(0,000100
"ut on "ound Stri"e price :4=R< Maturity :days< Pre iu :4=R< "ut 31 411') 90 401000&1 "ut 38 411'* 90 401000% 1 "ut 39 411'% 90 4010000* "ut 3; 411') )0 40100''' "ut 3? 411'* )0 401001(0 "ut 3@ 411'% )0 401000)0
Solution5 Issues !or )ndy to consider5
Uddin !ra"#ai
++
Solution Manual
11 Because his e-pectation is for Q'0 to )0 daysQ he should confine his choices to
the )0 day options to 0e sure and capture the ti in@ of the e-chan@e rate chan@e1 :We ha6e no e-plicit idea of Bhy he 0elie6es this specific ti in@1< %1 The choice of Bhich stri"e price is an interestin@ de0ate1 The loBer the stri"e price :11'* or 11'%<, the cheaper the option price1 The reason they are cheaper is that, statistically spea"in@, they are increasin@ly less li"ely to end up in the oney The choice, @i6en that all the options are relati6ely Qcheap,Q is to pic" the stri"e price Bhich Bill yield the re?uired return1 The 411'% stri"e price is too far 2doBn,2 @i6en that ,ndy only e-pects the pound to fall to a0out 411'% E%pected Spot (ate 411'%00=R 411'%00=R 411'%00=R 411'%00=R 411'%00=R 411'%00=R Current Spot (ate 411*%)0=R 411*%)0=R 411*%)0=R 411*%)0=R 411*%)0=R 411*%)0=R
S0<o0 Put S1 Put S% Put S' Put S* Put S( Put S)
Stri&e (ate 411')=R Y 411'*=R X 411'%=R H 411')=R X 411'*=R Y 411'%=R H
Stri&e (ate 411')=R Y 411'*=R X 411'%=R H 411')=R X 411'*=R Y 411'%=R H <
Buyer o! put on pound5 Profit 9 Stri"e price [ :E-pected spot rate ; Pre iu S0<o0 Put S1 Put S% Put S' Put S* Put S( Put S) S0<o0 Maturity Stri&e (days price '0 411')=R '0 411'*=R '0 411'%=R @0 411')=R @0 411'*=R @0 411'%=R -ess5 E%pected spot rate 7411'%=R 7411'%=R 7411'%=R 7411'%=R 7411'%=R 7411'%=R Initial Investment
-ess premium H <et "ro!it 740100''' 4010'$% 7401001( 401001$+$ 7401000) :4010000*< 740100''' 4010'))+ 7401001( 40101&( 7401000) :401000)<
Maturity Current (days Spot (ate
Initial Investment
Uddin !ra"#ai
+&
Solution Manual
Put S* Put S( Put S)
)0 )0 )0 1
411*%)0 = R 411*%)0 = R 411*%)0 = R 8
R %(0,000100 R %(0,000100 R %(0,000100
)t Current Spot (ate 4 '(),(00 4 '(),(00 4 '(),(00 9 Total E%pected pro!it 4%,+(',00'100 4',0&','''1'' :4%(0,000100< ; Initial Investment )t Current Spot (ate 4 '(),(00100 4 '(),(00100 4 '(),(00100 ?
S0<o0 Put S* Put S( Put S)
<otional "rincipal (V R+(,0+(,0+(10& R1)),))),)))1)+ R*1),))),)))1)+
<et "ro!it or "ro!it (ate 4010'))+ 40101&( :401000)<
(#I ++%> &)(> 7+0>
(is&5 They could lose it all :full pre iu < <otes5 1 S If ,ndy in6ested an indi6idual2s principal purely in this specific option, they Bould 0uy an option of the folloBin@ notional principal :pounds<1 % S Jet Profit H Stri"e price [ :E-pected spot rate ; Pre iu < ' S Don@ position 9 Jotional Principal - profit rate * S Initial in6est ent at current spot rate 9 R %(0,000 - 411*%)0 = R 9 4 '(),(00 ( S 8!I 9 Total profit N Initial in6est ent at .urrent Spot rate1
Uddin !ra"#ai
+$
Solution Manual
"ro+lem3?0115 Call #ptions on British pounds0 Calculatin$ call option premiums !or len$thenin$ maturities0 )ME(IC)< M#'EPARAMETERS .urrent Spot 8ate :US cents=fc< Forei@n Interest 8ate :(> as 10(< 5o estic Interest 8ate :10> as 11< !ption :1, .,DDH 71, PUT< Stri"e 8ate :US cents=fc< 5ays to Maturity ,nnual Golatility :10> as 11< INPU T 1+0 &100> &100> 1 1+0 $0 10100> Price 5elta Ka a Theta '1%&$ 01(0' 010*&1 )1)$(*
EC(#"E)< M#'EPrice 5elta Ka a Theta '1'0% 01*$$$ 010*)' )1*%$*
The call option pre iu :0aseline calculation shoBn here<, chan@es Bith aturity as folloBsE European Maturity "rice '0 11$'% )0 %1+1* $0 '1'0% 1%0 '1+&+ 1(0 *1%0)
Uddin !ra"#ai
&0
Solution Manual
1&0 %10 %*0 %+0 '00 ''0 ')0

5ays call option on pre iu 1
*1(+& *1$1% (1%1) (1*$) (1+(( (1$$) )1%%%

:US cents= pound< is a function of aturity
"ro+lem3?0185 "ut #ptions on euros0 Calculatin$ put option premiums on t/o di!!erent volatilities0 INPU T 110&*0 *100> %100> 71 10* $0 &> )ME(IC)< M#'EPrice 5elta Ka a Theta EC(#"E)< M#'E!ption :1, .,DDH 71, PUT< Stri"e 8ate :US cents=fc< 5ays to Maturity ,nnual Golatility :10> as 11< Price 5elta Ka a Theta 010*) 7011+%% 010($ 01*0%' 01*0% 7011)$% 010($1 %1(&%
PARAMETERS .urrent Spot 8ate :US cents=fc< Forei@n Interest 8ate :(> as 10(< 5o estic Interest 8ate :10> as11<
The input set shoBn here is for the &100> 6olatility 6aluation1 8eplacin@ &> Bith 1%> Bill yield the folloBin@1 (esults5 The put option pre iu 6olatility 0ased on 6olatilityE "remium(FAI
"remium(centsAeuro
Uddin !ra"#ai
&1
Solution Manual
&> 1%>
01*0) 110'+
40100 40101
"ro+lem3 ?0195 Solar Tur+ines and 6ene7uelan +olivares0 Calculatin$ put option premiums on a devaluin$ currency0 )ssumptions Spot rate Stri"e rate Jotional principal :US4< Jotional principal :0oli6ares< BolivaresAF 1,)00100 1,&00100 4%(0,000100 *00,000,000 CentsABoliv FABolivares ares 40100 010)%( 40100 010(((((()
)ME(IC)< M#'EPARAMETERS .urrent Spot 8ate :US cents=fc< Forei@n Interest 8ate :(> as 10(< 5o estic Interest 8ate :10> as 11< INPUT 010)%( %*100> %100> Price 5elta Ka a Theta 01001 701%%+$ *&111)% 0100)$
EC(#"E)< M#'E!ption :1, C)--H 71, "CT< Stri"e 8ate :US cents=fc< 5ays to Maturity ,nnual Golatility :10> as 11< 71 010(() $0 %0100> Price 5elta Ka a Theta 01001 701%'') *&10%$$ 01000$
Uddin !ra"#ai
&%
Solution Manual
The calculated put option pre iu E :cents per 0oli6ar< 5i6ided 0y 100 for cents=4 :this is 4=0oli6ar, pre iu < Jotional principal of 0oli6ares Total cost of put option
01001 40100 *00,000,000 4*,000
"ro+lem3 ?01;5 6itro de Me%ico0 Calculatin$ a call option premium on the Me%ican peso0 .anadian )ME(IC)< M#'E4=peso .4 011'$0 Price 01%++ .4 011(00 5elta 01'%1+ .4 '(0,000100 Ka a 01%)%& %,(1+,$&(1) 1 Theta 01+'' EC(#"E)< M#'E")()METE(S .urrent Spot 8ate :US cents=fc< Forei@n Interest 8ate :(> as 10(< 5o estic Interest 8ate :10> as 11< !ption :1, C)--H 71, "CT< Stri"e 8ate :US cents=fc< 5ays to Maturity ,nnual Golatility :10> as 11< I<"CT 1'1$ )100> 1%100> 1 1( 1&0 1*100> Price 5elta Ka a Theta 01%& 01'%(& 01%($ 01+%&)
)ssumptions Spot rate Stri"e rate Jotional principal :US4< Jotional principal :Me-ican pesos<
Uddin !ra"#ai
&'
Solution Manual
"ut option pre iu on peso :.anadian cents per peso< "ut option pre iu on peso :.anadian dollars per peso< Jotional principal in pesos Total cost of put option :.4<
01%& .4 0100%&00 %,(1+,$&(1) 1 .4 +,0(01')
"ro+lem3 ?01?5 "ut #ptions on Chinese (enmin+i Calculatin$ put option premiums on the (m+0 )ssumptions Spot rate Stri"e rate (m+AF G0? J FA(m+ F0018 F0011 CentsA(m+ 110E@;E 1101111
)ME(IC)< M#'E")()METE(S .urrent Spot 8ate :US cents=fc< Forei@n Interest 8ate :(> as 10(< 5o estic Interest 8ate :10> as 11< !ption :1, C)--H 71, "CT< Stri"e 8ate :US cents=fc< 5ays to Maturity ,nnual Golatility :10> as 11< Put option pre iu , US4 cents=8 0 Put option pre iu , US4=8 0 I<"CT 111+)*+ 1*100> *100> 71 1111111 $0 *100> 0100( 40100 Price 5elta Ka a Theta 0100' 7010'(( 01''** 010+)(
EC(#"E)< M#'EPrice 5elta Ka a Theta 0100( 7010*&% 01*%(* 0100'(
Uddin !ra"#ai
&*
Solution Manual
Chapter-6
6nternational 'arit1 Con)itions %6'C)

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi Uddin !ra"#ai
&(
Solution Manual
Chapter 3 @ ,International "arity Conditions4

"ro+lem 3 @015 Bi$ Mac Bam+ur$er Standard Solution5
:1< :%< :1< N :%<9 :'< :1< N 4%1&0 9 :*< :*< N :%< 9 :(<^
U1S1 ,r@entina .anada Euro ,rea Capan
Bi$ Mac "rice in -ocal Currency 4 %1&0 Ps +1(0 .4 '1(0 L %1$0 Z '00
)ctual E%chan$e (ate 77777 Ps '1)0 = 4 .411)' = 4 4110% = L Z 1%% = 4
Bi$ Mac "rices in 'ollars 4%1&0 4%10& 4%11( 4%1$) 4%1*)
Implied """ o! the 'ollars 1 Ps%1)& = 4 .4 11%( = 4 4 01$+ = L Z 10+11* = 4
-ocal currency under (1 A over (O 6aluation 7777777 7 %(1)0> 7 %'1'0> (1)*> 7 1%1%0>
Calculation notes5 .olu n ' 9 .olu n 1 N .olu n %H e-cept for the euro, Bhich is .olu n 1 - .olu n % : L %1$0 - 4110% 9 4%1$) < .olu n * 9 .olu n 1 N 4%1&0H e-cept for the euro, Bhich is 4%1&0 N .olu n 1 :4%1&0 N L%1$0 94 01$+< .olu n ( 9 .olu n * 7 .olu n % N .olu n %
Uddin !ra"#ai
&)
Solution Manual
or
In a0o6e for ula of percenta@e chan@e for indirect ?uotation, the I plied PPP 0eco es 0e@innin@ rate :S1< and actual e-chan@e rate 0eco es endin@ rate :S%<1
"ro+lem 3 @085 E%chan$e (ate "ass1Throu$h Solution5 )ssumptions Initial spot e-chan@e rate in yen per dollar Initial price of a Jissan E-pected US dollar inflation rate for the co in@ year E-pected Capanese yen inflation rate for the co in@ year 5esired rate of pass throu@h 0y Jissan 6alue Z1%%=4 Z',000,000 %100> 0100> +0100>
Uddin !ra"#ai
&+
Solution Manual
Uddin !ra"#ai
&&
Solution Manual
"ro+lem 3 @095 )r$entine pesos Solution5 )ssumptions Spot e-chan@e rate, fi-ed pe@, early Canuary %00% Spot e-chan@e rate, Canuary %$, %00' US inflation for year :per annu < ,r@entine inflation for year :per annu <
6alue Ps 1 = 4 Ps '1% = 4 %1%0> %0100>
Uddin !ra"#ai
&$
Solution Manual
Uddin !ra"#ai
$0
Solution Manual
"ro+lem 3 @0;5 International Fisher E!!ect0 Solution5 )ssumptions !ne year interest rate, US dollars !ne year interest rate, Euro _one .urrent spot e-chan@e rate
6alue '100> (100> L 110% = 4
Uddin !ra"#ai
$1
Solution Manual
For International Fisher E!!ect. /e use +elo/ !ormulaD
Uddin !ra"#ai
$%
Solution Manual
Uddin !ra"#ai
$'
Solution Manual
"ro+lem 3 @0?5 Covered Interest )r+itra$e (CI) 1 'enmar& I Solution5 Ca es .han@ needs to deter ine Bhether the returns fro the ar0itra@e e-ceed the opportunity costs of the U1S1 dollar funds1 The direction of potential profita0ility is deter ined 0y co parin@ the difference in interest rates :(100> 7 '100> 9 %100>< and the forBard discount, 711$+*>1 )r+itra$e (ule o! Thum+5 Aere, the difference in interest rates is @reater than the forBard pre iu or discount :%> M 711$+><, so Ca es .han@ should 0orroB dollars :loBer interest rate< and in6est for .I, in 5anish "roner1 5ifference in interest rates :i "r [ i 4< DessE ForBard discount on the "roner .I, profit potential %100> 7 11$+> 010'>
This tells Ca es .han@ that he should 0orroB dollars and in6est :.I,< in 5anish "roner for profit1 Therefore
Uddin !ra"#ai
$*
Solution Manual
Ca es .han@ @enerates a co6ered interest ar0itra@e profit of 41'1$' 0ecause he is a0le to @enerate an e6en hi@her interest return in 5anish "roner than he Q@i6es upQ 0y sellin@ the proceeds forBard at the forBard rate1
Uddin !ra"#ai
$(
Solution Manual
"ro+lem 3 @0@5 Covered Interest )r+itra$e (CI) 'enmar& B U "art (a 0 Solution5 The U1S1 dollar '7 onth interest rate noB rises fro '1000> to *1000>1 :*100> 7 '100> 9 1100><1 Jote that anyti e the difference in interest rates does not e-actly e?ual the forBard pre iu , it ust 0e possi0le to a"e .I, profit one Bay or another1 )r+itra$e (ule o! Thum+5 Aere, the difference in interest rates is less than the forBard discount :1100> ] 01$+><, so Ca es .han@ should start 0y 0orroBin@ 5anish "roner, e-chan@in@ into US dollars, in6estin@ in dollar interest and sellin@ the dollar proceeds forBard to loc" in a .I, profit1 5ifference in interest rates :i "r [ i 4< DessE ForBard discount on the "roner .I, profit potential 1100> 7 11$+> 7 01$+>
This tells Ca es .han@ that he should 0orroB 5anish "roner and and in6est :.I,< in U1S1 dollars for profit1
Uddin !ra"#ai
$)
Solution Manual
a< Ca es .han@ @enerates a co6ered interest ar0itra@e profit of "r$*,110 0ecause, althou@h U1S1 dollar rates are loBer, the U1S1 dollar is sellin@ forBard at a pre iu a@ainst the 5anish "roner1 CI)1 'enmar& B U "art ( + 0 0 The U1S1 dollar '7 onth interest rate noB rises fro '1000> to *1000>1 Jote that anyti e the difference in interest rates does not e-actly e?ual the forBard pre iu , it ust 0e possi0le to a"e .I, profit one Bay or another1 Aere, the difference in interest rates is DESS than the forBard discount, so Ca es .han@ should start 0y 0orroBin@ 5anish "roner, e-chan@in@ into US dollars, in6estin@ in dollar interest and sellin@ the dollar proceeds forBard to loc" in a .I, profit1 5ifference in interest rates :i "r [ i 4< '100>
Uddin !ra"#ai
$+
Solution Manual
DessE ForBard discount on the "roner .I, profit potential
7 11$+> 11$'>
0< This is a 0it of a tric"y ?uestion1 5en ar" is not a e 0er of the euro #one itself, 0ut its central 0an" does pay a @reat deal of attention to nei@h0orin@ interest rates and onetary policy in the euro #one1 If the 5anish the central 0an" of 5en ar" uses the euro as its reference rate1 If the 5anish authorities did increase interest rates to that of
Uddin !ra"#ai
$&
Solution Manual
the euro #ones, .I, profit potential is noB re6ersedE .I, profit Bould 0e @enerated 0y startin@ Bith US dollars and in6estin@ in "roner1
"ro+lem 3 @0E5 Covered Interest )r+itra$e U Napan0 Solution5 Aere, the difference in interest rates is less than the forBard pre iu , so Ou"i"o Miya"i should 0orroB Capanese yen, e-chan@e to dollars, in6est in dollars for ) onths, and sell the dollar proceeds forBard1 :7%100> ] 11)'>< 5ifference in interest rates :i Z [ i 4< 7%100> DessE ForBard pre iu on the yen 11)'> .I, profit potential 009EL This tells Ou"i"o Miyah"i that she should 0orroB yen and in6est :.I,< in U1S1 dollars for profit1
Uddin !ra"#ai
$$
Solution Manual
Ou"i"o @enerates a .I, profit 0y in6estin@ in the hi@her interest rate currency, the dollar, and at the sa e ti e sellin@ the dollar proceeds forBard at a forBard pre iu Bhich does not co pletely ne@ate the interest1 "ro+lem 3 @0G5 Cncovered Interest )r+itra$e 11 Napan Solution5 Aere, the difference in interest rates is not offset at all 0y usin@ forBards, 0ecause Ou"i"o is not co6erin@1 She e-pects the spot e-chan@e rate at the end of the period to 0e the sa e as at the 0e@innin@1 5ifference in interest rates :i4 7 iZ< 9 %100> Jot Usin@ ForBard co6er 9 0100> UI, profit potential 9 %100>
Uddin !ra"#ai
100
Solution Manual
"ro+lem 3 @0J5 International "arity Conditions in E*uili+rium Solution5 )ssumptions Forecast annual rate of inflation for .anada Forecast annual rate of inflation for United States !ne7year interest rate for .anada !ne7year interest rate for United States Spot e-chan@e rate !ne7year forBard e-chan@e rate
6alue 90@8L 9000L ?0@8L ?000L .411)0=4 .411)1=4
Uddin !ra"#ai
101
Solution Manual
Uddin !ra"#ai
10%
Solution Manual
Uddin !ra"#ai
10'
Solution Manual
Jote that the differentials are not e-actly e?ual, reflectin@ the application of the appro-i ate for 1 "ro+lem 3 @0105 Mary Smyth 11 CI) Solution5 Aere, the difference in interest rates is less than the forBard pre iu , so Mary S yth should 0orroB dollars, e-chan@e the into SBiss francs, in6est for $0 days, and sell the francs forBard1 ForBard pre iu on the SBiss franc 9 (10)> 5ifference in interest rates :I SF [ I 4< 9 7%100> .I, profit potential 9 '10)> This tells Mary S yth she should 0orroB U1S1 dollars and in6est :.I,< in SBiss francs for profit1
Uddin !ra"#ai
10*
Solution Manual
Mary S yth a"es a .I, profit of 4+,&*&110 on each illion she in6ests1 "ro+lem 3 @0115 Mary Smyth 11 CI) Solution5 JoB Mary S yth is Bishin@ to ta"e her chances Bith the future spot rate1 Ki6en the fact that SBiss franc interest rates are actually loBer than dollar rates, the only real Bay Mary S yth can co e out ahead here is if the SBiss franc ends up appreciatin@ si@nificantly a@ainst the dollar o6er $0 days1 5ifference in interest rates :i SF 7 i4< 9 :)>7&>< 9 7%100> Jot Usin@ ForBard co6er 9 0100>
Uddin !ra"#ai
10(
Solution Manual
UI, profit potential Bith no chan@e in spot rate 9
7%100>
The endin@ spot rate needs to 0e SF 11($%%=4 or turn an unco6ered interest ar0itra@e profit1
ore :lar@er< less in order for Mary to
Uddin !ra"#ai
10)
Solution Manual
"ro+lem 3 @0185 Mary Smyth 11 one month later Solution5 The fact that the difference in interest rates does not e-actly offset the forBard pre iu indicates that a co6ered interest ar0itra@e potential e-ists1 Because the forBard pre iu is @reater than the interest differential, Mary S yth she in6est in the loBer interest rate currency :SF< after 0orroBin@ in the relati6ely hi@h interest rate currency :US4<1 ForBard pre iu on the SBiss franc 9 '1+$10> 5ifference in interest rates :iSF [ i4< 9 : *1&0> 7 &>< 9 7'1%0> .I, profit potential 9 01($)> This tells Mary S yth she should 0orroB U1S1 dollars and in6est :.I,< in SBiss francs for profit1
Uddin !ra"#ai
10+
Solution Manual
Mary S yth a"es a .I, profit of 41,(++1%$ on each 41,000,000, she in6ests1 "ro+lem 3 @0195 -an$&a/i Island (esort Solution5 )ssumptions 6alue .har@e for suite plus eals :in rin@@it< +)0 Spot e-chan@e rate :rin@@it per US4< '1& US4 cost today for a '0 day stay 4),000100 Malaysian rin@@it inflation rate e-pected to 0e *100> U1S1 dollar inflation rate e-pected to 0e 1100>
Uddin !ra"#ai
10&
Solution Manual
a0 Bo/ many dollars mi$ht you e%pect to need one year hence !or your 901day vacation> Spot e-chan@e rate Malaysian rin@@it inflation rate e-pected to 0e U1S1 dollar inflation rate e-pected to 0e E-pected spot rate one year fro noB 0ased on PPP Aotel char@es e-pected to 0e paid 1 year fro noB for a '07day stay US dollars needed on the 0asis of these tBo e-pectationsE +0 By /hat percent has the dollar cost $one up> =hy> JeB dollar cost !ri@inal dollar cost Percent chan@e in US4 cost .alculation JotesE 4),0)0100 N 4),000100 9 F1101 or a 1000L increase 9M 1;1000L 9 1; 01019 F1101 : 1100> is inflation of U1S1 < The dollar cost has risen 0y the US dollar inflation rate1 This is a result of your esti ation of the future suite costs and e-chan@e rate chan@in@ in relation to inflation1 "ro+lem3 @01;5 Covered Interest a$ainst the <or/e$ian &rone0 Statoil, the national oil co pany of JorBay, is a lar@e, sophisticated, and acti6e participant in 0oth the currency and petroche ical ar"ets1 ,lthou@h it is a JorBe@ian co pany, 0ecause it operates Bithin the @lo0al oil ar"et, it considers the U1S1 dollar as its functional currency, not the JorBe@ian "rone1 ,ri Karlsen is a currency trader for Statoil, and has i ediate use of either 4* illion or the JorBe@ian "rone e?ui6alent<1 Ae is faced Bith the folloBin@ ar"et rates, and Bonders Bhether he can a"e so e ar0itra@e profits in the co in@ $0 days1 Solution5 )ssumptions 4),0)0100 4),000100 1100> 8M '1& =4 *100> 1100> 8M '1$1%$=4 %',+1%100 4),0)0100
6alues
Uddin !ra"#ai
10$
Solution Manual
,r0itra@e funds a6aila0le Spot e-chan@e rate :J"r=4< '7 onth forBard rate :J"r=4< U1S1 dollar '7 onth interest rate JorBe@ian "rone '7 onth interest rate
4*,000,000 )1((% )1(%)* (1)'> *1%(>
)r+itra$e (ule o! Thum+5 If the difference in interest rates is @reater than the forBard pre iu =discount, or e-pected chan@e in the spot rate for UI,, in6est in the hi@her interest yieldin@ currency1 If the difference in interest rates is less than the forBard pre iu :or e-pected chan@e in the spot rate<, in6est in the loBer yieldin@ currency1 5ifference in interest rates : i J"r 7 i 4< DessE ForBard pre iu on the "rone .I, profit potential 711'&> 11(+> 011$>
This tells ,ri Karlsen he should 0orroB U1S1 dollars and in6est in the loBer yieldin@ currency, the JorBe@ian "rone, sellin@ the dollars forBard $0 days, and therefore earn co6ered interest ar0itra@e :.I,< profits1
Uddin !ra"#ai
110
Solution Manual
,ri Karlsen can a"e 4%,10)1&' for Statoil on each 4* illion he in6ests in this co6ered interest ar0itra@e :.I,< transaction1 Jote that this is a 6ery sli rate of return on an in6est ent of such a lar@e a ount1 9M ,nnuali#ed rate of return 9 01%1> "ro+lem 3 @01?5 Fran&!urt and <e/ Mor&
Uddin !ra"#ai
111
Solution Manual
Solution5 Money and forei@n e-chan@e ar"ets in Fran"furt and JeB Oor" are 6ery efficient1 Usin@ the folloBin@ ar"et infor ation, ansBer the folloBin@ ?uestionsE )ssumptions Spot e-chan@e rate :4=L< !ne7year Treasury 0ill rate E-pected inflation rate Fran&!urt 11% )1(0> Un"noBn <e/ Mor& 11% '1%0> %100>
a0 =hat do the !inancial mar&ets su$$est !or in!lation in Europe ne%t year> ,ccordin@ to the Fisher effect, real interest rates should 0e the sa e in 0oth Europe and the US1 Since the for ula for no inal rate is @i6en asH <ominal rate H Z( 1Oreal % ( 1Oe%pected in!lation [ 1 1 Aence, 1 ; real rate 9 :1 ; no inal< N :1 ; e-pected inflation< 1 ; no inal rate 1 ; e-pected inflation 1 ; real Therefore the real rate in the US isE The e-pected rate of inflation in Berlin is thenE Fran&!urt 10)1(0> Un"noBn 10111&> <e/ Mor& 10'1%0> 1 0%100> Y 111 10111&> 111&>
(1%)>
+0 Estimate today:s one1year !or/ard e%chan$e rate +et/een the dollar and the euro0 Spot e-chan@e rate :4=L< US dollar one7year Treasury 0ill rate European euro one7year Treasury 0ill rate !ne year forBard rate :4=L< 11% '1%0> )1(0> 111)%&
Uddin !ra"#ai
11%
Solution Manual
"ro+lem 3 @01@5 Chamoni% chateau rentals0 Oou are plannin@ a s"i 6acation to Mt1 Blanc in .ha oni-, France, one year fro noB1 Oou are ne@otiatin@ o6er the rental of a chateau1 The chateau2s oBner Bishes to preser6e his real inco e a@ainst 0oth inflation and e-chan@e rate chan@es, and so the present Bee"ly rent of L&,000 :.hrist as season< Bill 0e adYusted upBards or doBnBards for any chan@e in the French cost of li6in@ 0etBeen noB and then1 Oou are 0asin@ your 0ud@etin@ on PPP1 French inflation is e-pected to a6era@e '1(> for the co in@ year, Bhile U1S1 dollar inflation is e-pected to 0e %1(>1 The current spot rate is 4111&*0=L1 What should you 0ud@et as the U1S1 dollar cost of the one Bee" rental3 )ssumptions Spot e-chan@e rate :4=L< E-pected US inflation for co in@ year E-pected French inflation for co in@ year .urrent chateau no inal Bee"ly rent :L< 6alues 4111& %1(0> '1(0> &000
Forecastin$ the !uture rent amount and e%chan$e rate5 6alues PPP e-chan@e rate forecast :4=L< 111+%) Spot :one year< 9 Spot - : 1 ; US4 inflation < = : 1 ; French inflation < Jo inal onthly rent, in euros, one year fro noB &,%&0100 8ent noB - : 1 ; France inflation < .ost of rent one year fro noB in US dollars 4$,+0&1&0 8ent one year fro noB = PPP forecasted spot rate <ote5 students ay in?uire as to Bhether the euro, a currency for a ultitude of countries Bhich ay actually ha6e su0stantial differences in inflation locally, really Bill react to inflationary pressures and differentials as PPP Bould predict a @ood ?uestion1
Uddin !ra"#ai
11'
Solution Manual
"ro+lem 3 @01E5 East )siatic Company U Thailand0 The East ,siatic .o pany :E,.<, a 5anish co pany Bith su0sidiaries all o6er ,sia, has 0een fundin@ its Ban@"o" su0sidiary pri arily Bith U1S1 dollar de0t 0ecause of the cost and a6aila0ility of dollar capital as opposed to Thai 0aht :< deno inated de0t1 The treasure of E,.7 Thailand is considerin@ a one7year 0an" loan for 4'(0,0001 The current spot rate is *%1&*=41 !ne year loans are 1*100> in 0aht 0ut only &1&&(> in dollars1 )ssumptions 6alues .urrent spot rate, *11'(&=4 E-pected Thai Baht inflation : part a < *1(0> E-pected dollar inflation : part a < %1%0> Doan principal in U1S1 dollars 4'(0,000100 US dollar interest rate, 17year loan &1&(> a<1First, it is necessary to forecast the future spot e-chan@e rate for the =41
5ifferent e-pectations of the future spot e-chan@e rate, either PPP for part a<, or an e-pected de6aluation for part 0<, alloB the isolation of e-actly hoB any Thai 0aht Bould 0e re?uired to repay the dollar loan1
Uddin !ra"#ai
11*
Solution Manual
Uddin !ra"#ai
11(
Solution Manual
a< ,ssu in@ a PPP forecast of the future spot rate, *'1&0'$=4, it Bill ta"e
1),)$',(+$100 0aht to repay the U1S1 dollar loan1 The i plied cost of funds, in 0aht ter s, is 111'*>1 0< ,ssu in@ a future spot rate for the 0aht Bhich is (> Bea"er than the current spot rate *%1&*=4 that Bill leads to rises the i plied cost to 1*1)0>1 .urrent Spot 8ate Pct1 .han@e : the 6alue of Baht doBn a@ainst the dollar< JeB Forecast rateE JeB spot :S%< 9 old spot rate = :1 [ (>< JeB spot :S%< 9 *%1&*=4 = :1 [ 010(>< Calculation <otes5 4'(0,000100 - 110&&$ 9 4'&1,0$&100 4'(0,000100 - *%1&*=4 9 1*,$$*,000100 :Initial in6est ent < 4'&1,0$&100 - *(10$=4 9 1+,1&',+0$100 :8epaid in 0aht< Implied cost H (epaid K Initial investment U 1 I plied cost 9 1+,1&',+0$100 N 1*,$$*,000100 [ 1 I plied cost 9 111*)0 [ 1 I plied cost 9 011*)0 I plied cost 9 1*1)0>
c< In part a, the cost of funds is e-pected to 0e 111'*>, cheaper than 0orroBin@
*%1&*=4 7(100> *(10$=4
locally at 1*100>1 In part 0, hoBe6er, the e-pected cost of 1*1)0> Bould indicate it Bould 0e cheaper to 0orroB locally77in 0aht1
Uddin !ra"#ai
11)
Solution Manual
"ro+lem 3 @01G5 Maltese Falcon5 80091800;0 The infa ous solid @old falcon, initially intended as a tri0ute 0y the Kni@hts of 8hodes to the Kin@ of Spain in appreciation for his @ift of the island of Malta to the order in 1('0, has recently 0een reco6ered1 The falcon is 1* inches in hei@ht and solid @old, Bei@hin@ appro-i ately *& pounds1 Kold prices in late %00% and early %00', pri arily as a result of increasin@ political tensions, ha6e risen to 4**0=ounce1 The falcon is currently held 0y a pri6ate in6estor in Istan0ul, Bho is acti6ely ne@otiatin@ Bith the Maltese @o6ern ent on its purchase and prospecti6e return to its island ho e1 The sale and pay ent are to ta"e place in March %00*, and the parties are ne@otiatin@ o6er the price and currency of pay ent1 The in6estor has decided, in a shoB of @oodBill, to 0ase the sales price only on the falcon2s specie 6alue 77 its @old 6alue1 The current spot e-chan@e rate is 01'$ Maltese lira :MD< per U1S1 dollar1 Maltese inflation is e-pected to 0e a0out &1(> for the co in@ year, Bhile U1S1 inflation, on the heels of a dou0le7dip recession, is e-pected to co e in at only 11(>1 If the in6estor 0ases 6alue in the U1S1 dollar, Bould he 0e 0etter off recei6in@ Maltese lira in one year 77 assu in@ purchasin@ poBer parity, or recei6in@ a @uaranteed dollar pay ent assu in@ a @old price of 4*%0 per ounce3 S0<#0 Wei@ht of falcon, in pounds Total nu 0er of ounces in Bei@ht Price of @old, 4=ounce Falcon 6alue 0ased on price of @old The PPP forecast of the MD=4 e-chan@e rateE .urrent spot rate, Maltese lira=dollar E-pected Maltese inflation E-pected dollar inflation PPP forecast of Maltese lira=dollar 009J G0?0L 10?0L 00;1@J Mar109 Mar10; *& *& +)& +)& 4**0100 4*%0100 4''+,$%0100 4'%%,()0100
If the in6estor 0ases his @ross sales proceeds in U1S1 dollars, the @uaranteed dollar pay ent at 4*%0=ounce yields a lar@er a ount :4'%%,()0< than acceptin@ Maltese lira assu in@ PPP :4'1),11)<1
Uddin !ra"#ai
11+
Solution Manual
"ro+lem 3 @01J5 -ondon Money Fund0 To Ao@an is the ana@er of an international oney ar"et fund ana@ed out of Dondon1 Unli"e any oney funds that @uarantee their in6estors a near ris"7free in6est ent Bith 6aria0le interest earnin@s, Ti Ao@an2s fund is a 6ery a@@ressi6e fund that searches out relati6ely hi@h interest earnin@s around the @lo0e, 0ut at so e ris"1 The fund is pound7deno inated1 Ti is currently e6aluatin@ a rather interestin@ opportunity in Malaysia1 The Malaysian @o6ern ent has 0een enforcin@ a nu 0er of currency and capital restrictions since the ,sian .risis of 1$$+ to protect and preser6e the 6alue of the Malaysian rin@@it :8M<1 The current spot rate of 8M'1+(=4 has 0een adYusted only recently :Culy %00(< fro its pre6iously fi-ed 6alue of 8M'1&0=41 Docal currency ti e deposits of 1&07day aturities are earnin@ $1)00> per annu 1 The Dondon Eurocurrency ar"et for pounds is yieldin@ *1%00> per annu on si ilar 1&07day aturities1 The current spot rate on the British pound is 411+)*0=R, and the 1&07day forBard rate is 411+*%0=R1
Uddin !ra"#ai
11&
Solution Manual
Solution5 )ssumptions Principal in6est ent, British pounds Spot e-chan@e rate :4=R< 1&07day forBard rate :4=R< Malaysian rin@@it 1&07day yield Spot e-chan@e rate, 8M = 4
6alues R1,000,000100 411+) = R 411+* $1)0> '1+(
The initial pound in6est ent i plicitly passes throu@h the dollar into Malaysian rin@@it1 The rin@@it is fi-ed a@ainst the dollar, hence the endin@ 8M=4 rate is the sa e as the current spot rate1 The pound, hoBe6er, is not fi-ed to either the dollar or rin@@it1 Ti Ao@an can purchase a forBard a@ainst the dollar, alloBin@ hi to co6er the dollar=pound e-chan@e rate1
Uddin !ra"#ai
11$
Solution Manual
Uddin !ra"#ai
1%0
Solution Manual
If Ti Ao@an in6ests in the Malaysian rin@@it deposit, and accepts the unco6ered ris" associated Bith the 8M=4 e-chan@e rate : ana@ed 0y the @o6t1<, and sells the dollar proceeds forBard, he should e-pect a return of )11%*> on his 1&07day pound in6est ent1 This is 0etter than the *1%00> he can earn in the euro7pound ar"et1 Interestin@ly, if Ti Ao@an chose to not sell the dollars forBard, and accepted the unco6ered ris" of the 4=R e-chan@e rate as Bell, he ay or ay not do 0etter than )11%*>1 For e-a ple, if the spot rate re ained unchan@ed at 411+)*0=R, Ti 2s return Bould only 0e *1&00>1 This de onstrates that uch of the added return Ti is earnin@ is arisin@ fro the forBard rate itself, and not purely fro the no inal interest differentials1 "ro+lem 3 @0805 The )!rican +eer standard o! """0 In 1$$$ the Econo ist a@a#ine reported the creation of an inde- or standard for the e6aluation of ,frican currency 6alues usin@ the local prices of 0eer1 Beer Bas chosen as the product for co parison 0ecause Mc5onald2s had not penetrated the ,frican continent 0eyond South ,frica, and 0eer et ost of the sa e product and ar"et characteristics re?uired for the construction of a proper currency inde-1 In6estec, a South ,frican in6est ent 0an"in@ fir , has replicated the process of creatin@ a easure of PPP li"e that of the Bi@ Mac Inde- of the Econo ist, for ,frica1 The inde- co pares the cost of a '+( illiliter 0ottle of clear la@er 0eer across su07Sahara ,frica1 ,s a easure of PPP the 0eer needs to 0e relati6ely ho o@eneous in ?uality across countries, needs to possess su0stantial ele ents of local anufacturin@, inputs, distri0ution, and ser6ice, in order to actually pro6ide a easure of relati6e purchasin@ poBer1 The 0eers are first priced in local currency :purchased in the ta6erns of the local an, and not in the hi@h7priced tourist centers<, then con6erted to South ,frican rand1 The prices of the 0eers in rand are then co pared to for one easure of Bhether the local currencies are under6alued :7 >< or o6er6alued :; >< 6ersus the South ,frican rand1 Use the data in the e-hi0it and co plete the calculation of Bhether the indi6idual currencies are under7 or o6er76alued1
Uddin !ra"#ai
1%1
Solution Manual
Beer "rices
Im Country South ,frica BotsBana Khana Kenya MalaBi Mauritius Ja i0ia _a 0ia _i 0a0Be Beer .astle .astle Star Tus"er .arls0er@ PhoeniWindhoe" .astle .astle In -ocal currency 8and Pula .edi Shillin@ KBacha 8upee J4 KBacha _4 In -ocal currency %1' %1% 1,%00100 *11%( 1&1( 1( %1( 1,%00100 $ plied In """ rand rate 7777 %1$* '11+ *10% %1)) '1+% %1( '1(% 11*) 7777 01$) (%11+* 1+1$' &10* )1(% 110$ (%11+* '1$1 Spot (ate (9A1?AJJ 7777 01+( '+$11 101%+ )1$) *10' 1 '*01)& )11( Cnder or overvalued to rand (L 7777 %+1$0> '+1)0> +*1)0> 1(1)0> )11&0> &1+0> ('110> 7')1*0>
<otes5 11 Beer price in South ,frican rand 9 Price in local currency = spot rate on '=1(=$$1 %1 I plied PPP e-chan@e rate 9 Price in local currency = %1'01 '1 Under or o6er6alued to rand 9 I plied PPP rate = spot rate on '=1(=$$1
Uddin !ra"#ai
1%%
Solution Manual
Chapter-7
Uddin !ra"#ai
1%'
Solution Manual
Chapter 3 E
"ro+lems 3 Usin@ the folloBin@ econo ic, financial, I 0usiness indicators fro Fe0ruary ',%00', issue of The Econo ist to ansBer the pro0le 1 throu@h 101
Uddin !ra"#ai
1%*
Solution Manual
"ro+lem 3 E015 Current spot rates0 What are the current spot e-chan@e rates for the folloBin@ cross rates3 a1 Capanese yen=US dollar e-chan@e rate1 CZ=4< 01 Capanese yen=,ustralian dollar e-chan@e rate, CZ=,4<
Uddin !ra"#ai
1%(
Solution Manual
,ustralian dollar=US dollar e-chan@e rate, :,4=4< Solution5 Currency per pound Calculation o! Country Fe+ ?th Current spot e%chan$e rates ,ustralia ,4 %1+& = R Z 1$+ = R N 4 11)( = R 9 Z 11$1'$ = 4 Capan Z 1$+ = R Z 1$+ = R N ,4 %1+& = R 9 Z +01&) = ,4 U1S1 4 11)( = R ,4 %1+& = R N 4 11)( = R 9 ,4 11)& = 4
c1
"ro+lem 3 E085 "urchasin$ po/er parity !orecasts0 ,ssu in@ purchasin@ poBer parity, and assu in@ that the forecasted chan@e in consu er prices is a @ood pro-y of predicted inflation, forecast the folloBin@ cross ratesE a0 Capanese yen=US dollar in 1 year +0 Capanese yen=,ustralian dollar in 1 year c0 ,ustralian dollar=US dollar in 1 year Solution5 In!lation 8009e Country :Ki6en in ta0le< ,ustralia %1+> or 010%+ Capan 701+> or 7010 0+ U1S1 %11> or 010%1 Spot (ate (calculation $iven a+ove in pro+lem3E01 Z 11$1'$ = 4 Z +01&) = ,4 ,4 11)& = 4
Uddin !ra"#ai
1%)
Solution Manual
Uddin !ra"#ai
1%+
Solution Manual
"ro+lem 3 E095 International Fisher !orecasts0 ,ssu in@ International Fisher applies to the co in@ yearH forecast the folloBin@ future spot e-chan@e rates usin@ the @o6ern ent 0ond rates for the respecti6e country currenciesE a1 Capanese yen=US dollar in 1 year 01 Capanese yen=,ustralian dollar in 1 year c1 ,ustralian dollar=US dollar in 1 year Solution5 Country ,ustralia Capan U1S1 81year Govt Bonds interest (ates (11*> or 010(1* 01&0> or 0100& '1+)> or 010'+)
Spot (ate (calculation $iven a+ove in pro+lem3E01 Z 11$1'$ = 4 Z +01&) = ,4 ,4 11)& = 4
Uddin !ra"#ai
1%&
Solution Manual
Uddin !ra"#ai
1%$
Solution Manual
"ro+lem 3 E0;5 Implied real interest rates0 If the no inal interest rate is the @o6ern ent 0ond rate, and the current chan@e in consu er prices is used as e-pected inflation, calculate the i plied QrealQ rates of interest 0y currency1 a<1 ,ustralian dollar QrealQ rate 0<1 Capanese yen QrealQ rate c<1 US dollar QrealQ rate Solution5 <ominal (ate (81year Govt0 Bonds interest (ates (11*> or 010(1* 01&0> or 0100& '1+)> or 010'+) Chan$e in consumer prices (the chan$e in consumer prices is used as e%pected in!lation %1+> or 010%+ 701+> or 7010 0+ %11> or 010%1
Country ,ustralia Capan U1S1
Uddin !ra"#ai
1'0
Solution Manual
Uddin !ra"#ai
1'1
Solution Manual
"ro+lem 3 E0?5 Forecastin$ /ith real interest rates0 Usin@ the real interest rates calculated in pro0le +1*H forecast the folloBin@ future spot e-chan@e rates usin@ real interest rate differentialsE a1 Capanese yen=US dollar e-chan@e rate in 1 year 01 Capanese yen=,ustralian dollar e-chan@e rate in 1 year c1 ,ustralian dollar=US dollar e-chan@e rate in 1 year Solution5 Country ,ustralia Capan U1S1 (eal interest rate %1'&> or 010%'& 11(1> or 0101(1 11)'> or 0101)'
Uddin !ra"#ai
1'%
Solution Manual
Uddin !ra"#ai
1''
Solution Manual
"ro+lem 3 E0@5 For/ard rates0 Usin@ the spot rates and three7 onth interest rates a0o6e, calculate the $07day forBard rates forE a1 Capanese yen=US dollar e-chan@e rate 01 Capanese yen=,ustralian dollar e-chan@e rate c1 ,ustralian dollar=US dollar e-chan@e rate '7 onth oney ar"et Oear ,@o *1%&> or 010*%& 01'0> or 0100' 11+$> or 0101+$
.ountry ,ustralia Capan U1S1
Uddin !ra"#ai
1'*
Solution Manual
Uddin !ra"#ai
1'(
Solution Manual
<ote5 ,ll interest rates need to 0e adYusted for a $0 day period of a ')0 day year for the calculation1 "ro+lem 3 E0E5 (eal economic activity and misery1 .alculate the country2s Misery Inde- (unemployment O in!lation and then use it li"e interest differentials to forecast the future spot e-chan@e rate, one year into the future1
Country ,ustralia2s Misery IndeCapan2s Misery IndeU1S1 Misery Inde-
Cnemployment (ecent 2uarter )1%> (1(> )10>
In!lation 8009e :Ki6en in ta0le< %1+> 701+> %11>
Misery Inde% &1$> or 010&$ *1&> or 010*& &11> or 010&1
Forecast spot 9 Spot - : 1 ; Misery71< = : 1 ; Misery7%<
Uddin !ra"#ai
1')
Solution Manual
Summary S0 <o0 a1 Z=4 e-chan@e rate in 1 year 01 Z=,4 e-chan@e rate in 1 year c1 ,4 =4 e-chan@e rate in 1 year
Startin$ Spot (ate Z 11$1'$ = 4 Z +01&) = ,4 ,4 11)& = 4
Forecast Spot (ate Z 11(1+( = 4 Z )$11& = ,4 ,4 11)$= 4
Uddin !ra"#ai
1'+
Solution Manual
"ro+lem 3 E0G5 Balance o! payments approach0 Usin@ the trade and current account infor ation, forecast the direction of the spot e-chan@e rates for the co in@ year1 a0 Napanese yenACS dollar e%chan$e rate in 1 year Capan is runnin@ a trade I current account surplus1 US is runnin@ a trade I current account deficit1 5ollar should Bea"en a@ainst the Capanese yen1 +0 Napanese yenA)ustralian dollar e%chan$e rate in 1 year Capan is runnin@ a trade I current account surplus1 ,ustralia is runnin@ a trade I current account deficit1 ,ustralian dollar should Bea"en a@ainst the yen1 c0 )ustralian dollarACS dollar e%chan$e rate in 1 year ,ustralia is runnin@ a trade I current account US is runnin@ a trade I current account deficit Indeter inate1 "ro+lem 3 E0J5 Current accounts and spot rates0 ,re the current account forecasts fro the pre6ious ?uestion consistent Bith the e-chan@e rate trends shoBn a0o6e3 )ns0 Capanese yen appreciated in 6alue a@ainst the US dollar o6er %00%1 This is consistent Bith the trade and current account 0alances 0ein@ run 0y the tBo countries1 The ,ustralian dollar consistently stren@thened a@ainst the US dollar o6er %00%1 ,lthou@h ,ustralia and the United States ha6e si ilar current and forecast rates of inflation, and si ilar trade and current account deficits, ,ustralia has de onstrated stron@er econo ic @roBth :K5P< o6er the past year than the US1 "ro+lem 3 E0105 E%chan$e rate trends and +ounds0 Use the @raphs to deter ine trends, ean 6alues, and upper and loBer 0ounds to spot e-chan@e rate o6e ents1 Trend up or Cpper -o/er Cross (ates do/n Mean Bound Bound MenACSF US4 doBn 11(71%0 1'%1(0 10)100 )FACSF US4 doBn 11)(711&0 %100 11((
Uddin !ra"#ai
1'&
Solution Manual
Chapter-8 Transaction E%posure
Uddin !ra"#ai
1'$
Solution Manual
Chapter 3 G Transaction E%posure

"ro+lem 3 G015 -ipitor in Indonesia0
E6aluatin@ the costs of hed@in@ a transaction e-posure1 )ssumptions 8ecei6a0le due in ' Spot rate, 8p=4 onths, in Indonesian rupiah :8p< 6alues 8p+(0,000,000 &,&00 $,*00 $,&00 4+&,000100 (is& 6alues )ssessment
E-pected spot rate in $0 days, 8p=4 '7 onth forBard rate, 8p=4 Mini u dollar a ount accepta0le at settle ent )lternatives
10 (emain Cncovered0 Settle )A( in J0 days at current spot rate0 If spot rate in $0 days is sa e as current :8p+(0,000,000 =8p&,&00=4< 4&(,%%+1%+ If spot rate in $0 days is 8p$,*00=4 :8p+(0,000,000 = 8p$,*00=4< 4+$,+&+1%' If spot rate in $0 days is 8p$,&00=4 :8p+(0,000,000 = 8p$,&00=4< 4+),('01)1 80 Sell Indonesian rupiah !or/ard0 ,=8 sold forBard $0 days Q.ost of co6erQ is the forBard discount on 8p 4+),('01)1 7*01&0>
8is"y 8is"y 8is"y
.ertain
)nalysis5 The Indonesian rupiah has 0een hi@hly 6olatile in recent years1 This eans that durin@ the $07day period, any 6ariety of econo ic or political or social e6ents could lead to an upBard 0ounce in the e-chan@e rate, reducin@ the dollar proceeds at settle ent to an unaccepta0le le6el1 Unfortunately, the forBard contract does not result in dollar proceeds Bhich eet the ini u ar@in1 The forBard co6er yields dollar proceeds of only 4+),('01)1, short of the needed 4+&,0001 The cost of forBard co6er, *01&>, is indicati6e of the Qartificial interest ratesQ used 0y so e financial institutions Bhile pricin@ deri6ati6es in e er@in@, illi?uid, and 6olatile ar"ets1 In the end, Pfi#er Bill ha6e to decide Bhether a"in@
Uddin !ra"#ai
1*0
Solution Manual
the sale into this specific ar"et is Borth 0rea"in@ a co pany policy on ini u :forBard co6er< or ta"in@ si@nificant currency ris" 0y not usin@ forBard co6er1 "ro+lem 3 G085 Em+raer o! Bra7il0 ,d6ise E 0raer on currency e-posure1 )ssumptions 8ecei6a0le due in one year, US dollars Paya0le due in one year, US dollars Spot rate, 84=4 !ne7year US dollar eurocurrency interest rate !ne7year Bra#ilian @o6t deposit note I plied one year forBard rate 9 spot - : 1 ; i84 < = : 1 ; i4 < )nalysisD <et e%posure at time o! cash settlements5 !ne year ,=8 due DessE !ne year ,=P due Jet e-posure
proceeds
6alues 4&0,000,000 4%0,000,000 '1* *100> 1*100> '1+%)$ (is& )ssessment
6alues 4&0,000,000 :4%0,000,000< 4)0,000,000
.ertain
This is a net lon@ position, eanin@, E 0raer Bill 0e recei6in@ US dollars on net1 Ki6en the history of the Bra#ilian real, that it has traditionally suffered fro rapid depreciation and occasional de6aluation, a net lon@ position in dollars 0y ost Bra#ilian co panies is considered a @ood thin@1 Cash settlement o! the net position5 Bra#ilian reais in one year at current spot rate Bra#ilian reais in one year at one year forBard rate (is& 6alues )ssessment 84 %0*,000,000100 8is"y 84 %%',)1(,'&*1)% .ertain
In this case, hoBe6er, 0ecause the real is sellin@ forBard at a considera0le discount, the net lon@ position 77 if sold forBard 77 yields considera0ly ore real than the current spot rate1 It should also 0e noted, hoBe6er, that if the real Bere to fall considera0ly o6er the year, to a 6alue @reater than 84'1+'=4, 0y re ainin@ unhed@ed E 0raer Bould enYoy @reater reais returns1
Uddin !ra"#ai
1*1
Solution Manual
"ro+lem 3 G095 Mattel Toys0 )dvise Mattel on its European sales0 )ssumptions $07day ,=8, euros .urrent spot rate, 4=euro .redit Suisse $07day forBard rate, 4=euro Barclays $07day forBard rate, 4=euro E-pected spot rate in $0 days, 4=euro $07day eurodollar interest rate $07day euro7euro interest rate I plied $07day forBard rate :calculated<, 4=euro $07day eurodollar 0orroBin@ rate $07day euro7euro 0orroBin@ rate Mattel Toys Bei@hted a6era@e cost of capital Bed$in$ )lternatives 6alues 6alues %0000000 4110) 4110) 4110) 4110' '1)0> *1)0> 4110) +1)0> &1*0> 10100> (is& )ssessment
10 (emain Cncovered. settlin$ )A( in J0 days at mar&et rate :%0 illion euros = future spot rate< If spot rate in $0 days is sa e as current If spot rate in $0 days is sa e as .redit Suisse forBard rate If spot rate in $0 days is sa e as Barclays forBard rate If spot rate in $0 days is e-pected spot rate 80 Sell euros !or/ard J0 days Settle ent a ount at .redit Suisse forBard rate Settle ent a ount at Barclays forBard rate 90 Money Mar&et Bed$e 4%1,1)0,000100 4%1,1%0,000100 .ertain .ertain 4%1,%00,000100 4%1,1)0,000100 4%1,1%0,000100 4%0,)00,000100 8is"y 8is"y 8is"y 8is"y
Uddin !ra"#ai
1*%
Solution Manual
Principal ,=8 in euros 5iscount factor for euro 0orroBin@ rate for $0 days BorroB euros a@ainst $07day ,=8 .urrent spot rate, 4=euro US dollar current 6alue Mattel2s W,.. carry7forBard factor for $0 days Future 6alue of oney ar"et hed@e
%0000000 1=:1 ; :10&* 01$+$* $0=')0<< 1$(&&)'&1($ 4110) 4%0,+)',$()1$0 1 ; :11000 110%( $0=')0< 4%1,%&',0((1&' .ertain
E6aluation of ,lternati6esE The oney ar"et hed@e @uarantees Mattel the @reatest dollar 6alue for the ,=8 Bhen usin@ the cost of capital as the rein6est ent rate :carry7forBard rate<1 "ro+lem 3 G0;5 Bindustan -ever0 ,d6ise Aindustan De6er on its Capanese yen purchase1 )ssumptions 1&07day account paya0le, Capanese yen Spot rate, yen=4 Spot rate, rupees=4 I plied :calculated< spot rate, yen=rupee 1&07day forBard rate, yen=rupees E-pected spot rate in 1&0 days, yen=rupees 1&07day Indian rupee in6estin@ rate 1&07day Capanese yen in6estin@ rate .urrency a@ent2s e-chan@e rate fee Aindustan De6er2s cost of capital Bed$in$ )lternatives 6alues &,(00,000 1%01) *+1+( %1(%(+ %1* %1) &100> 11(0> *1&(> 1%100> 6alues :1%01)0 = *+1+(<
Spot (ate ((pAF
(is& )ssessment
10 (emain Cncovered. settlin$ )A" in 1G0 days at spot rate If spot rate in 1&0 days is sa e as current spot If spot rate in 1&0 days is sa e as forBard rate If spot rate in 1&0 days is e-pected spot rate ',')(,*)*1'* ',(*1,)))1)+ ',%)$,%'01++ %1(%(+ %1* %1) 8is"y 8is"y 8is"y
Uddin !ra"#ai
1*'
Solution Manual
80 Buy Napanese yen !or/ard 1G0 days Settle ent a ount at forBard rate :8s< 90 Money Mar&et Bed$e Principal ,=P :yen< discount factor for yen in6estin@ rate for 1&0 days Principal needed to eet ,=P in 1&0 days :yen< .urrent spot rate, yen=rupee Indian rupee, current a ount :8s< Aindustan De6er2s W,.. carry7forBad factor for 1&0 days Future 6alue of oney ar"et hed@e :8s< ;0 Indian Currency )$ent Bed$e Principal ,=P :yen< .urrent spot rate, yen=rupee .urrent ,=P :8s< Plus a@ent2s fee :*1&(0>< Aindustan2s W,.. carry7forBad factor for 1&0 days on fee Total future 6alue of a@ent2s fee :8s< Total ,=P, future 6alue, ,=P ; fee :8s< ',(*1,)))1)+ %1* .ertain
&,(00,000100 01$$%) &,*'),+%*1(+ %1(%(+ ','*0,*111%) 110) ',(*0,&'(1$*
.ertain
&,(00,000100 %1(%(+ ',')(,*)*1'* 1)',%%(10% 110) 1+',01&1(% ',('&,*&%1&+
.ertain
Evaluation o! )lternatives5 The currency a@ent is the loBest total cost, in .E8T,IJ future rupee 6alue, of all certain alternati6es1 "ro+lem3G0?5 Te& 1 Italian account receiva+le0 Bed$in$ !orei$n e%chan$e ris&5 a receiva+le )ssumptions ,ccount recei6a0le due in ' onths, in euros Spot rate :4=euro< '7 onth forBard rate :4=euro< 6alues *000000 01$& 01$&(
Uddin !ra"#ai
1**
Solution Manual
'7 onth euro interest rate '7 onth put option on eurosE Stri"e rate :4=euro< Pre iu , percent per year Te"2s Bei@hted a6era@e cost of capital =hat are the costs and ris& o! each (a alternative> 6alue 11 5o nothin@ and e-chan@e euros for dollars at end of ' onths , ount of euro recei6a0le If spot rate in ' onths is the sa e as the forBard rate US dollar proceeds of recei6a0le Bould 0e , ount of euro recei6a0le If spot rate in ' onths is the sa e as the current spot rate US dollar proceeds of recei6a0le Bould 0e *000000 01$&( 4',$*0,00010 0 *000000 01$& 4',$%0,00010 0
)100> 01$& '100> 1%100> (+ Certainty>
Gery uncertainH 8is"y
Gery uncertainH 8is"y
80 Sell euro receiva+le !or/ard at the 91month !or/ard rate , ount of euro recei6a0le forBard rate US dollar proceeds of recei6a0le Bould 0e 90 Buy a put option on euros , ount of euro recei6a0le .urrent spot rate :4=euro< Pre iu on put option, > .ost of put option :a ount - spot rate percent pre iu < If the spot rate at end of '7 onths is less than stri"e rate the option is e-ercised yieldin@ @ross dollars of *000000 01$& '100> 411+,)00100 Mini u 4',$%0,00010 0 is *000000 01$&( 4',$*0,00010 0 .ertainH Doc"ed7in
@uaranteedH
Uddin !ra"#ai
1*(
Solution Manual
Dess cost of option :pre iu < plus US4 interest on pre iu :41%1,1%&100< Jet proceeds of ,=8 if option is e-ercised 4',+$&,&+%10 :this is Mini u < 0 Su ary of ,lternati6es Galue 4',$%0,00010 5o Jothin@ 0 4',$*0,00010 Sell ,=8 forBard 0 4',+$&,&+%10 Buy Put !ption 0
could 0e @reater1 .ertainty3 8is"y .ertain Mini u
c If Te" Bishes to play it safe, it should loc" in the forBard rate1 d If Te" Bishes to ta"e a reasona0le ris" :defininin@ 2reasona0le2 is another issue<, and has a directional 6ieB that the dollar is @oin@ to depreciate 6ersus the euro o6er the ' onth period 77 past 401$&=euro, then Te" i@ht consider purchasin@ the put option1 "ro+lem3G0@5 Te& 1 Napanese account paya+le0 Aed@in@ forei@n e-chan@e ris"E a paya0le )ssumptions ,ccount paya0le to Capan Sony7Te", in Capanese yen Spot rate :yen=4< )7 onth forBard rate :yen=4< )7 onth yen deposit rate )7 onth dollar interest rate )7 onth call option on yenE Stri"e rate :yen=4< Pre iu , percent per year Te"2s Bei@hted a6era@e cost of capital =hat are the costs and ris& o! each alternative> a 6alue 6alues &,000,000100 1%( 1%% 11(0> *100> 1%( *100> 1%100> + Certainty
10 'o nothin$ and e%chan$e dollars !or yen at end o! @ months , ount of yen paya0le If spot rate in ' onths is the sa e as the forBard rate US dollar cost of settlin@ paya0le Bould 0e &,000,000100 1%% 4)(,(+'1++ Gery uncertainH 8is"y
Uddin !ra"#ai
1*)
Solution Manual
, ount of yen paya0le If spot rate in ' onths is the sa e as the current spot rate US dollar cost of settlin@ paya0le Bould 0e
&,000,000100 1%( 4)*,000100 Gery uncertainH 8is"y
80 Buy yen !or/ard @1months to loc& in cost o! settlin$ paya+le , ount of yen paya0le forBard rate US dollar cost of settlin@ paya0le Bould 0e &,000,000100 1%% 4)(,(+'1++
.ertainH Doc"ed7in
90 Money mar&et hed$e 11 invest !unds in yen deposit no/ Principal needed at the end of )7 onths, yen 5iscount factor, )7 onths ` yen deposit rate Oen deposit needed, noB .urrent spot rate, yen=4 US dollars needed noB, for e-chan@e into yen .arry7forBard rate, ) onths ` Te"2s W,.. US cost of oney ar"et hed@e at end of )7 onths ;0 Buy a call option on Napanese yen , ount of yen paya0le .urrent spot rate :yen=4< Pre iu on call option, > .ost of call option If the spot rate at end of '7 onths is @reater than stri"e rate the option is e-ercised yieldin@ @ross dollars of Plus cost of option :pre iu < plus US4 interest on pre iu Total cost of e-ercisin@ call option on yen Summary o! )lternatives5 Cost o! settlin$ )A" &,000,000100 1%( *100> 4%,()0100 Ma-i u cost @uaranteedH could 0e less1 Certainty> &,000,000 01$$%) +,$*0,**+ 1%( 4)',(%'1(+ 110) 4)+,''*1$$ 1=:1 ; :101( 1&0=')0<<
1 ; :11% 1&0=')0<
4)*,000100 4%,+1'1)0 4)),+1'1)0 6alue
Uddin !ra"#ai
1*+
Solution Manual
5o Jothin@ Buy yen forBard 5eposit yen noB : oney ar"et hed@e< Buy call option on yen
4)*,000100 4)(,(+'1++ 4)+,''*1$$ 4)),+1'1)0
8is"y .ertain .ertain Ma-i u
c 0 If Te" Bishes to ta"e a reasona0le ris" :defininin@ 2reasona0le2 is another issue<, and has a directional 6ieB that the yen ay 0e depreciatin@ 6ersus the dollar o6er the ) onth period 77 to 0eloB a 6alue of O1%(=4, then Te" i@ht consider purchasin@ the call option1
"ro+lem3G0E5 Te& 1 British Telecom +id0 Aed@in@ forei@n e-chan@e ris" of a contract 0id ,ssu ptions ,ccount recei6a0le of 0id, supply I install :British pounds< Spot rate :dollars per pound< Te"2s Bei@hted a6era@e cost of capital ForBard rate :dollars per pound< British pound in6est ent rate British pound 0orroBin@ rate Put option on poundE Stri"e rate :dollars per pound< Pre iu , US dollars per pound Galues R1,000,000 11(+ 1%100> 17 onth 11(+% *100> $100> 11(& 40101
*7 onth 11(+( *1%(> $1%0> 11(& 40101
)nalysis and Evaluation5 If Te" Bins the 0id, it Bill 0e lon@ forei@n currency, ha6in@ a 1 illion pound position Bhich is first 0ac"lo@ the an ,=81 If and Bhen Te" is aBarded the 0id, it Bould ha6e * onths :1%0 days< until cash settle ent of the 1 illion pound position1 a< 0< Galue .ertainty 10 'o <othin$ 11 (emainin$ Cncovered Wait 1%0 days and e-chan@e pounds for dollars spot
Uddin !ra"#ai
1*&
Solution Manual
If the endin@ spot rate is the sa e as current spot rate If the endin@ spot rate is the sa e as the * onth forBard rate It could, hoBe6er, 0e uch loBer1
41,(+0,000100 41,(+(,000100
8is"y 8is"y
80 Sell the 1 million pounds !or/ard illion pounds forBard at the *7 onth forBard rate The pri ary pro0le Bith this is that if Te" does not Bin the 0id, it has a forBard contract to sell pounds Bhich it Bill not earn1 Sellin@ 1 41,(+(,000100 .ertain Galue If Te" Wins Bid
90 Money mar&et hed$e 11 +orro/ a$ainst e%pected receipts E-pected receipts, pounds 5iscount factor for *7 onths at pound 0orroBin@ rate Proceeds fro 0orroBin@, noB, in pounds .urrent spot rate, US4 per pound Proceeds fro 0orroBin@, noB, in US4 .arry7forBard rate, * onths ` Te"2s W,.. Galue in * onths of oney ar"et hed@e, US4 !ption, if e-ercised :if endin@ spot rate less than 411(&< Put option pre iu , up7front and the *7 onths opportunity cost of pre iu Total pre iu e-pense Mini u R1,000,000 01$+0% R$+0,%*) 11(+ 41,(%',%&(1$0 110* 41,(&*,%1+1'* 41,(&0,000100 41%,000100 *&0 41%,*&0100 Mini u H dollars recei6ed if put option purchased 41,()+,(%0100 .ould 0e More The oney ar"et hed@e pro6ides the lar@est US4 6alue at the end of * onths, 0ut it assu es certainty of 0id2s aBard1 The ad6anta@e of the option is if Te" does not Bin the 0id, the option can easily 0e sold1 "ro+lem3 G0G5 Te& 11 S/edish price list0 1=:1;:010$% 1%0=')0<<
1 ; :11% 1%0=')0<
Uddin !ra"#ai
1*$
Solution Manual
Aed@in@ forei@n currency price ?uotes and potential sales1 )ssumptions E-pected sale o6er $07day period, SBedish "rona Spot rate, SKr=4 $07day forBard rate, SKr=4 '7 onth dollar interest rate '7 onth "rone deposit interest rate '7 onth "rone 0orroBin@ interest rate '7 onth put option on "roneE Stri"e rate, SKr=4 Pre iu Te"2s Bei@hted a6era@e cost of capital
6alues (,000,000100 $1% $1%( *100> )11(> 1%1(0> $1% '1(0> 1%100>
Bed$in$ )lternatives5 This is an uncertain e-posure1 ,lthou@h sales Bill ost li"ely occur, it is not "noBn Bhat total ?uantity of sales Bill occur, and therefore Bhat Te"2s actual lon@ position in SBedish "rone Bill 0e1 S0<o0 10 'o <othin$ 11 (emain Cncovered0 The endin@ spot rate at the ti e of settle ent could 0e nearly anythin@1 If the endin@ spot rate is the sa e as current spot rate :SKr=4< If the endin@ spot rate is the sa e as forBard :SKr=4< 80 Sell S/edish &rone !or/ard Sold forBard '7 onths at forBard rate :SKr=4< AoBe6er, re e 0er that Te" does not "noB total sales1 90 Money mar&et hed$e Te" Bould 0orroB noB a@ainst e-pected proceeds of :SKr< 5iscount rate of SKr interest rate for $07days SKr proceeds fro 0orroBin@ recei6ed up7front (,000,000100 01$)$+ *,&*&,*&*1&( 4(*0,(*01(* .ertain 6alue Certainty>
4(*',*+&1%) 4(*0,(*01(*
8is"y 8is"y
Uddin !ra"#ai
1(0
Solution Manual
E-chan@ed at current spot rate :SKr=4< US dollars recei6ed noB Te" carry7forBard rate for US4 for $0 days Money ar"et hed@e proceeds in $07days ;0 Buy a 91month put option on S/edish &rone Proceeds Bill 0e option less pre iu if e-ercised : ini u < E-chan@e rate if e-ercised=not e-ercised :SKr=4< , ount of SBedish "rone If e-ercised, it Bill yield a @ross dollar a ount of Put option pre iu !pportunity cost of pre iu Total future 6alue of pre iu Mini u net dollar proceeds at end of $0 days :e-ercised @ross a ount less future 6alue of pre iu <
$1% 4(%+,00$1%% 110' 4(*%,&1$1(0 I! e%ercised $1% (,000,000100 4(*',*+&1%) 41$,0%11+* (+01)( 41$,($%1'$ 4(%',&&(1&+ Mini u I! not e%ercised :rando choice< &1&$ (,000,000100 4()%,*%$1+0 41$,0%11+* (+01)( 41$,($%1'$ 4(*%,&'+1'0
The oney ar"et hed@e pro6ides the hi@hest certain US dollar receipts1 :This is a@ain a result of the si@nificant increase in relati6e 6alue arisin@ fro carryin@7forBard the dollars at Te"2s W,..1 If Te" sincerely 0elie6es in its directional 6ieB, and is Billin@ to ta"e so e currency ris", the SKr Bould ha6e to fall to a0out SKr&1&$=4 in order for the put option hed@e to yield ore US dollars than the oney ar"et hed@e1 "ro+lem3 G0J5 Te& 11 S/iss dividend paya+le0 Bed$in$ an intra1company dividend payment0 )ssumptions 5i6idend declared, SBiss francs Spot rate, SFr=4 $07day forBard rate, SFr=4 '7 onth US dollar interest rate '7 onth SBiss franc interest rate '7 onth put option on SBiss francsE Stri"e rate, SFr=4 Pre iu , 4=SFr Te"2s Bei@hted a6era@e cost of capital Te"2s e-pected spot rate in $0 days, SFr=4 Bed$in$ )lternatives 6alue
6alues SFr1 (,000,000 11( 11(% *100> (1%(> 11(* 4010% 1%100> 11*+ Certainty>
Uddin !ra"#ai
1(1
Solution Manual
10 'o <othin$ 11 (emain Cncovered0 If the endin@ spot rate is the sa e as current spot rate :SFr=4< If the endin@ spot rate is the sa e as forBard :SKr=4< 8ealistically, the endin@ spot rate could 6ary 0etBeen SFr1 and SFr% per 41 80 Sell S/iss !rancs !or/ard Sold forBard '7 onths at forBard rate :SFr= 4< 90 Money Mar&et Bed$e BorroB SFr noB a@ainst future receipt Principal BorroB SFr at SFr interest rate for $07days SFr proceeds recei6ed noB 6ia 0orroBin@ E-chan@ed into US4 at spot rate of :SFr=4< 5ollars recei6ed noB .arry7forBard rate for US4 at Te"2s W,.. for $07days Money Mar"et Aed@ed proceeds in $0 days ;0 Buy a 91month put option on S/iss !rancs Proceeds 9 option 7 pre iu , if e-ercised : ini u < Effecti6e e-chan@e rate if e-ercised=not e-ercised, SFr=4 Principal of pay ent, SFr If e-ercised, it Bill yield a @ross dollar a ount of Put option pre iu !pportunity cost of pre iu Total future 6alue of pre iu Mini u net dollar proceeds at end of $0 days
4',''','''1'' 4',%&$,*+'1)&
8is"y 8is"y
4',%&$,*+'1)&
.ertain
SFr1 (,000,000 01$&+ SFr1 *,$'(,%%( 11( 4',%$0,1(0111 110' 4','&&,&(*1)% I! e%ercised I! not e%ercised
11(* SFr1 (,000,000
11*+ SFr1 (,000,000
4',%*),+('1%( 4',*01,')01(* 4+(,000100 4+(,000100 %,%(0100 %,%(0100 4++,%(0100 4++,%(0100 4',1)$,(0'1%( 4','%*,1101(*
Uddin !ra"#ai
1(%
Solution Manual
:e-ercised @ross a ount less future 6alue of pre iu <
Mini u
)nalysis0 The Money ar"et hed@e yields the hi@hest certain US dollar proceeds1 If, hoBe6er, Te" Bishes to accept so e de@ree of currency ris", and 0elie6es in the direction of a stron@er SFr, it ay choose the '7 onth put option1 Jote that the official e-pectation is SFr11*+=41 This is still not superior to the Money Mar"et Aed@e1 :The endin@ spot rate Bould need to 0e SFr11**=4 or stron@er to end up superior to the Money Mar"et Aed@e1<
"ro+lem3 G0105 <orthern (ain/ear0 Bed$in$ !orei$n e%chan$e ris&5 )A( & !or/ard points )ssumptions Spot rate, 5Kr=.4 '7 onth forBard rate, 5Kr=.4 )7 onth forBard rate, 5Kr=.4 1%7 onth forBard rate, 5Kr=.4 <orthern:s E%posures ,=8 due in ' onths, 5Kr ,=8 due in ) onths, 5Kr ,=8 due in 1%7 onths, 5Kr <orthern:s Manadatory For/ard Cover Payin@ the points forBard 8ecei6in@ the points forBard For/ ard 6alues 'iscount Days *1+ *1+1 701&(> *1+% 701&(> *1+* 701&*> X 1G0 01J0 days J111G0 days days ',000,000 %,000,000 1,000,000 X 1G0 01J0 days J111G0 days days +(> )0> (0> 100> $0> (0>
)nalysis & E%posure Mana$ement5 The 5anish "rone is sellin@ forBard at a discount 6ersus the .anadian dollarE it ta"es ore 5Kr=.4 forBard1 Jorthern 8ainBear is recei6in@ forei@n currency, 5Kr, at future dates :Qlon@ 5KrQ<1 Jorthern 8ainBear is therefore e-pectin@ to P,O TAE P!IJTS F!8W,851
Uddin !ra"#ai
1('
Solution Manual
8e?uired ForBard .o6er for JorthernE ,=8 due in ' onths, 5Kr ,=8 due in ) onths, 5Kr ,=8 due in 1%7 onths, 5Kr 5Kr ForBard .o6er ,=8 due in ' onths, 5Kr ,=8 due in ) onths, 5Kr ,=8 due in 1%7 onths, 5Kr E-pected .anadian dollar 6alue of 5Kr sold forBard
07$0 days +(>
$171&0 days )0>
M 1&0 days
(0> %,%(0,000 1,%00,000 (00,000 *++,+0+101 %(*,%'+1% $ 10(,*&(1%'
"ro+lem3 G0115 6amo (oad Industries0 Bed$in$ !orei$n e%chan$e ris&5 a paya+le )ssumptions .onstruction pay ent due in si-7 onths :,=P, ?uet#als< Present spot rate :?uet#als=4< Si-7 onth forBard rate :?uet#als=4< Kuate alan si-7 onth interest rate :per annu < U1S1 dollar si-7 onth interest rate :per annu < Ga o2s Bei@hted a6era@e cost of capital :W,..< E-pected spot rate in si-7 onths :?uet#als=4<E Ai@hest e-pected rate E-pected rate DoBest e-pected rate a =hat realistic alternatives are availa+le to 6amo> 10 =ait si% months and ma&e payment at spot rate Ai@hest e-pected rate E-pected rate DoBest e-pected rate 80 "urchase *uet7als !or/ard si%1months divided +y the !or/ard rate 41,0(0,000100 41,1(0,)&*1$' 41,'1%,(00100 ()A" 41,1&',0$&1($ Cost
6alues &,*00,000 + +11 1*100> )100> %0100> & +1' )1* Certainty
8is"y 8is"y 8is"y .ertain
Uddin !ra"#ai
1(*
Solution Manual
90 Trans!er dollars to *uet7als today. invest !or si%1months ?uet#als needed today :,=P discounted 1&0 days< .ost in dollars today :?uet#als to 4 at spot rate< factor to carry dollars forBard 1&0 days :1 ; :W,..=%<< .ost in dollars in si-7 onths :4 carried forBard 1&0 days < +,&(0,*)+1%$ 41,1%1,*$(1'' 111 41,%'',)**1&) .ertain
The second choice, the forBard contract, results in the loBest cost alternati6e a on@ certain alternati6es1
"ro+lem3 G0185 =orld/ide Travel0 Bed$in$ !orei$n e%chan$e ris&5 a paya+le )ssumptions ,c?uisition price I '7 onth ,=P, JeBTaiBan dollars :JT4< Spot rate :JT4=4< '7 onth forBard rate :JT4=4< '7 onth TaiBan dollar deposit rate '7 onth dollar 0orroBin@ rate '7 onth call option on JT4 E6aluation of ,lternati6es 10 'o <othin$ 11 =ait 9 months and +uy <TF spot
6alues +,000,000 '( ') 11(0> &100> not a6aila0le .ost
.ertainty
If spot rate is the sa e as current spot rate 4%00,000100 8is"y If spot rate is the sa e as '7 onth forBard rate 41$*,***1** 8is"y ,lthou@h this Bould do nothin@ to co6er the currency ris", there Bould 0e no re?uired pay ent or 0orroBin@ for ' 7 onths1 80 Buy <TF !or/ard 91months ,ssured cost of JT4 at '7 onth forBard rate 41$*,***1** .ertain
The purchase of a forBard contract Bould not re?uire any cash up7front line 0y the
Uddin !ra"#ai
1((
Solution Manual
a ount of the forBard1 This is a non7cash e-pense1, 0ut the Ban" of AaBaii Bould reduce his a6aila0le credit line 0y the a ount of the forBard1 This is a non7cash e-pense1 90 Money Mar&et Bed$e5 E%chan$in$ CSF !or <TF no/. depositin$ !or 91months until payment ,c?uisition price in JT4 needed in '7 onths +,000,000 5iscounted 0ac" '7 onths at JT4 deposit rate 01$$)' , ount of JT4 needed noB for deposit ),$+',&*& Spot rate, JT4=4 '( US4 needed noB for e-chan@e 41$$,%(%1&0 US4 carry7forBard rate :'7 onth dollar 0orroBin@ rate< &100> .ertain .arry7forBard factor of US4 for '7 onth period 110% Total cost in US4 of settlin@ ,=P in '7 onths Bith Money Mar"et Aed@e 4%0',%'+1&) The currency ris" is eli inated, 0ut since Matt Morita Bould ha6e to e-chan@e the oney up7 front, it re?uires Matt Morita to increase his de0t outstandin@ for the entire '7 onths1 Aence, forBard contract hed@e is 0est alternati6e1 "ro+lem3G0195 Seattle Scienti!ic. Inc0 Costs and +ene!its o! cash versus cover0 )ssumptions Seattle2s '07day account recei6a0le, Capanese yen Spot rate, yen=4 '07day forBard rate, yen=4 $07day forBrad rate, yen=4 1&07day forBard rate, yen=4 Oo"asa2s W,.. Seattle Scientific2s W,.. 5esired discount on purchase price 0y Oo"asa 6alues 1%,(00,000 1%01%' 11$1+' 11&1+& 11+1%1 &1&(> 1%1(0> *1(0>
Cosh Miller should co pare tBo 0asic alternati6es, 0oth of Bhich eli inate the currency ris"1 10 )llo/ the discount and receive payment in Napanese yen in cash ,ccount recie6a0le :yen< 5iscount for cash pay ent up7front :*1(00>< , ount paid in cash net of discount .urrent spot rate 1%,(00,000 7()%,(00 11,$'+,(00 1%01%'
Uddin !ra"#ai
1()
Solution Manual
, ount recei6ed in U1S1 dollars 0y Seattle Scientific 4$$,%&&1&) 80 <ot o!!er any discounts !or early payment and cover e%posure /ith !or/ards ,ccount recei6a0le :yen< '07day forBard rate , ount recei6ed in cash in dollars, in '0 days 5iscount factor for '0 days ` Seattle2s W,.. Present 6alue of dollar cash recei6ed 1%,(00,000 11$1+' 410*,*011(+ 01$&$+ 410','%(1%+
Cosh Miller should politely decline Oo"asa2s offer to pay cash in e-chan@e for cash pay ent1
"ro+lem3 G01;5 =ilmin$ton Chemical Company0 Aed@in@ forei@n e-chan@e ris"E a paya0le )ssumptions Ship ent of phosphates fro Morocco, Moroccan dirha s Wil in@ton2s cost of capital :W,..< Spot e-chan@e rate, dirha s=4 Si-7 onth forBard rate, dirha s=4 !ptions on Moroccan dirha sE Stri"e price, dirha s=4 !ption pre iu :percent<
6alues ),000,000 1*100> 10 101* .all !ption 10 %100> United States
Put !ption 10 '100> Morocco
Si-7 onth interest rate for 0orroBin@ :per annu < )100> &100> Si-7 onth interest rate for in6estin@ :per annu < (100> +100> 8is" Mana@e ent ,lternati6es Galues .ertainty 10 (emain uncovered. ma&in$ the dirham payment in si% months at the spot rate in e!!ect at that date ,ccount paya0le :dirha s< Possi0le spot rate in si- onths 77 the current spot rate :dirha s=4< .ost of settle ent in si- onths :US4< ),000,000 10 4)00,000100 Uncertain1
Uddin !ra"#ai
1(+
Solution Manual
,ccount paya0le :dirha s< Possi0le spot rate in si- onths 77 forBard rate :dirha s=4< .ost of settle ent in si- onths :US4<
),000,000 101* 4(+),$%'10& Uncertain1
80 For/ard mar&et hed$e0 Buy dirhams !or/ard si% months0 ,ccount paya0le :dirha s< Si- onth forBard rate, dirha s=4 .ost of settle ent in si- onths :US4< ),000,000 101* 4(+),$%'10&
.ertain1
90 Money mar&et hed$e0 E%chan$e dollars !or dirhams no/. invest !or si% months0 ,ccount paya0le :dirha s< ),000,000100 5iscount factor at the dirha in6estin@ rate for ) onths 110'( 5irha s needed noB for in6estin@ :paya0le=discount factor< (,+$+,1011*( .urrent spot rate :dirha s=4< 10 US dollars needed noB 4(+$,+1011* .arry forBard rate for si- onths :W,..< 110+ US dollar cost, in si- onths, of settle ent 4)%0,%&$1&) .ertain1 ;0 Call option hed$e0 (<eed to +uy dirhams H call on dirhams !ption principal ),000,000100 .urrent spot rate, dirha s=4 10 Pre iu cost of option %100> !ption pre iu :principal=spot rate - > p < 41%,000100 If option e-ercised, dollar cost at stri"e price of 10100 dirha s=4 4)00,000100 Plus pre iu carried forBard si- onths :p 110+, W,..< 1%,&*0100 Total net cost of call option hed@e if e-ercised 4)1%,&*0100 Ma-i u 1 The loBest cost certain alternati6e is the forBard1 If Wil in@ton Bere to e-pect the dirha depreciate si@nificantly o6er the ne-t si- onths, it ay choose the call option1 "ro+lem3 G01?5 'a/$1Grip. Inc0 Aed@in@ forei@n e-chan@e ris"E a paya0le
to
Uddin !ra"#ai
1(&
Solution Manual
)ssumptions Purchase price of Korean anufacturer, in Korean Bon Dess initial pay ent, in Korean Bon Jet settle ent needed, in Korean Bon, in si- onths .urrent spot rate :Won=4< Si- onth forBard rate :Won=4< Plasti7Krip2s cost of capital :W,..< #ptions on Worean /on5 Stri"e price, Bon !ption pre iu :percent< Si-7 onth in6est ent interest rate :per annu < Si-7 onth 0orroBin@ rate :in6est ent rate ; %>< 8is" Mana@e ent ,lternati6es Call #ption 1,%00100 '100> C0S *100> )100> Galues
6alues +,0'0,000,000 71,000,000,000 ),0'0,000,000 1,%00 1,%)0 %(100> "ut #ption 1,%00100 %1*0> Worea 1)100> 1&100> .ertainty
10 (emain uncovered. ma&in$ the /on payment in @ months at the spot rate in e!!ect at that date ,ccount paya0le :Bon< ),0'0,000,000 Possi0le spot rate in si- onthsE current spot rate 1, :Bon=4< %00 .ost of settle ent in si- onths :US4< 4(,0%(,000100 ,ccount paya0le :Bon< ),0'0,000,000 Possi0le spot rate in si- onthsE forBard rate :Bon= 4< 1,%)0 .ost of settle ent in si- onths :US4< 4*,+&(,+1*1%$ 80 For/ard mar&et hed$e0 Buy /on !or/ard si% months ,ccount paya0le :Bon< ),0'0,000,000 ForBard rate :Bon=4< 1,%)0100 .ost of settle ent in si- onths :US4< 4*,+&(,+1*1%$
Uncertain1
Uncertain1
.ertain1
90 Money mar&et hed$e0 E%chan$e dollars !or /on no/. invest !or si% months0 ,ccount paya0le :Bon< 5iscount factor at the Bon interest rate for ) onths ),0'0,000,000 110&
Uddin !ra"#ai
1($
Solution Manual
Won needed noB :paya0le=discount factor< .urrent spot rate :Bon=4< US dollars needed noB .arry forBard rate for si- onths :W,..< US dollar cost, in si- onths, of settle ent ;0 Call option hed$e0 (<eed to +uy /on H call on /on !ption principal .urrent spot rate :Bon=4< Pre iu cost of option :>< !ption pre iu :principal=spot rate - > p < If option e-ercised=not e-ercised, dollar cost of Bon Pre iu carried forBard si- onths :p - 111%(, W,..< Total net cost of call option hed@e if e-ercised
(,(&',''','''1 '' 1,%00100 4*,)(%,+++1+& 111%( 4(,%'*,'+(100
.ertain1
I! e%ercised I! not e%ercised ),0'0,000,000 1,%00100 1,'0+100 '100> 41(0,+(0100 4(,0%(,000100 4*,)1',)1&1$+
1)$,($'1+( 1)$,($'1+( 4(,1$*,($'1+( 4*,+&',%1%1+% Ma-i u 1 The forBard contract pro6ides the loBest cost hed@in@ ethod for pay ent settle ent1 If, hoBe6er, the fir 0elie6es the endin@ spot rate Bill 0e Won 1'0+=4 or hi@her, the call option hed@e could pro6e loBer cost1 This Bould re?uire the fir , hoBe6er, to accept the forei@n e-chan@e ris" and sufferin@ the hi@her cost of the call option hed@e in the e6ent their spot rate e-pectations pro6ed incorrect1 "ro+lem3 G01@5 )*ua1"ure0 Bed$in$ !orei$n e%chan$e ris&5 a receiva+le )ssumptions 6alues , ount of recei6a0le, Capanese yen %0,000,000 Spot e-chan@e rate at ti e of sale :yen=4< 11&1%(( Boo"ed 6alue of sale :a ount=spot rate< 41)$,1%)10* 5ays recei6a0le due $0 ,?ua7Pure2s W,.. 1)100> .o petitor 0orroBin@ pre iu , yen %100> For/ard rates and premiums For/ard (ate !ne7 onth forBard rate :yen=4< 11+1+) Three7 onth forBard rate :yen=4< 11)1&'
"remium (10*> *1&&>
Uddin !ra"#ai
1)0
Solution Manual
!ne7year forBard rate :yen=4< Investment rates. L per annum 1 onth ' onths 1% onths Purchased options '7 onth call option on yen '7 onth put option on yen a1 ,lternati6e Aed@es 10 (emain uncovered0 ,ccount recei6a0le :yen< Possi0le spot rate in $0 days :yen=4< .ash settle ent in $0 days :US4< %1 ForBard ar"et hed@e1 ,ccount recei6a0le :yen< ForBard rate :Bon=4< .ash settle ent in $0 days :US4< 90 Money mar&et hed$e0 ,ccount recei6a0le :yen< 5iscount factor for $0 days Oen proceeds up front .urrent spot rate :Bon=4< US dollars recei6ed noB .arry forBard at ,?ua7Pure2s W,.. Proceeds in $0 days
11%1*( Cnited States *1&&> *1$*> (11$> Stri"e :yen=4< 11& 11& Galues
(11)> Napan 010$> 010$> 01'1> Pre iu 1100> '100> .ertainty
%0,000,000 11&1%(( 41)$,1%)10*
Uncertain1
%0,000,000 11)1&' 41+1,1&&1$1
.ertain1
%0,000,000 1100(%' 1$,&$(,&(& 11&1%(( 41)&,%*(1'& 110* 41+*,$+(1%0 1 ; ::1000$'+( ; 1 0%< - $0=')0<
1 ; :11) - $0=')0< .ertain1
;0 "ut option hed$e0 (<eed to sell yen H put on yen !ption principal .urrent spot rate :Bon=4< %0,000,000 11&1%((
Uddin !ra"#ai
1)1
Solution Manual
Pre iu cost of option :>< !ption p :principal=spot rate - > p < If option e-ercised, dollar proceeds Dess P carried forBard $0 days Jet proceeds in $0 days
'100> 4(,0+'1+& 41)$,*$11(' 7(,%+)1+' 41)*,%1*1+$ 110* carry7forBard rate Mini u 1
The put option does not KU,8,JTEE the co pany of settlin@ for the 0oo"ed a ount1 The oney ar"et and forBard hed@es doH the oney ar"et yieldin@ the hi@her proceeds1 + Brea&even rate +et/een the money mar&et and the !or/ard hed$e is determined +y the reinvestment rate5 Money ar"et, US4 up7front 41)&,%*(1'& ForBard contract, US4, end of $0 days 41+1,1&&1$1 :1 ; -< Brea"e6en rate, > per annu 1011+(> 11+(> +100> 41)&,%*( :1;-< 9 41+1,1&$ For $0 days
"ro+lem3 G01E5 Boto% =atch Company0 Bed$in$ policy )ssumptions ,ccount recie6a0le in $0 days :euros< Initial spot e-chan@e rate :4=euro< ForBard rate, $0 days :4=euro< E-pected spot rate in $0 to 1%0 days :4=euro<E .ase S1 E-pected spot rate in $0 to 1%0 days :4=euro<E .ase S% Bed$ed the Minimum +0> 1,()0,000 +0> 1,0$%,000 6alues 1,()0,000 401$+ 401$( 401$' 41100 Bed$ed the Ma%imum 1%0> 1,()0,000 1%0> 1,&+%,000
I! Boto% =atch Company \\ Proportion of e-posure to 0e hed@ed Total e-posure :euros< hed@ed proportion Mini u hed@e in euros :e-posure -
in prop<
Uddin !ra"#ai
1)%
Solution Manual
at the forBard rate :4=euro< loc"in@ in :4< Case 315 Endin$ spot rate is F00J9AI Proportion unco6ered :short< If endin@ spot rate is :4=L< Galue of unco6ered proportion :4< Galue of co6ered proportion :fro a0o6e< Total net proceeds, co6ered ; unco6ered Case 385 Endin$ spot rate is F100000AI Proportion unco6ered :short< If endin@ spot rate is :4=L< 6alue of unco6ered proportion :4< Galue of co6ered position :fro a0o6e< Total net proceeds, co6ered ; unco6ered Bench ar"E Full :100>< forBard co6er
401$( 41,0'',0'%
401$( 41,++0,$1%
*)&,000 401$' 4*'(,%*0 41,0'',0'% 41,*)&,%+%
7'1%,000 401$' :4%$0,1)0< 41,++0,$1% 41,*&0,+(%
*)&,000 41100 4*)&,000 41,0'',0'% 41,(01,0'% 41,*+(,+)0
7'1%,000 41100 :4'1%,000< 41,++0,$1% 41,*(&,$1% 41,*+(,+)0
This is not a conser6ati6e hed@in@ policy1 ,ny ti e a fir ay choose to lea6e any proportion unco6ered, or purchase co6er for ore than the e-posure :creatin@ a short position< the fir could e-perience nearly unli ited losses or @ains1 "ro+lem3G01G5 (ed/all "ump Company0 Aed@in@ forei@n e-chan@e ris"E a recei6a0le )ssumptions $07day ForBard rate, 4=euro 1&07day ForBard rate, 4=euro US Treasury 0ill rate 8edBall2s 0orroBin@ rate, euros, per annu 8edBall2s cost of e?uity !ptions on euros Cune aturity options Septe 0er aturity options Galuation of ,lternati6e Aed@es 6alues 41111 41111 '1)0> Today is March 1 5ate 17Fe0 E%chan$e (ate (FAeuro :4=euro< 4110& 41110
&100> 17Mar 1%100> Stri"e :4=euro< .all !ption 41110 '100> 41110 %1)0> Cune
Put !ption %100> 11%0> Sept
Uddin !ra"#ai
1)'
Solution Manual
, ount of recei6a0le, in euros a0 Bed$e in the !or/ard mar&et , ount of recei6a0le, in euros 8especti6e forBard rates :4=euro< US dollar proceeds as hed@ed :4< .arry forBard to Sept 1st at W,.. Total US4 proceeds on Sept 1st Total of 0oth pay ents +0 Bed$e in the money mar&et , ount of recei6a0le, in euros 5iscount factor for euro funds, period .urrent proceeds fro discountin@, euros .urrent spot rate :4=euro< .urrent US dollar proceeds .arry forBard rate for the period US dollar proceeds on future date Total of 0oth pay ents c0 Bed$e /ith options , ount of recei6a0le, in euros Buy put options for aturities :> spot 6alue< .arry forBard for the period %000000 :4**,000< 110) %000000 110% 1$)0+&* 41110 4%,1(),&)' 110) 4%,%&),%+( 4*,(%&,(&% %000000 41111 4%,%1%,000 110' 4%,%+&,')0
8ecei6a0le %000000
8ecei6a0le %000000
%000000 41111 4%,%%),000 77777 4%,%%),000 4*,(0*,')0
%000000 110* 1$%'0++ 41110 4%,11(,'&( 110) 4%,%*%,'0&
%000000 :4%),*00< 110)
Uddin !ra"#ai
1)*
Solution Manual
Pre iu
cost carried forBard to Sept 1
:4*),)*0<
:4%+,$&*< 4%,%00,000 7777 4%,%00,000
Kross put option 6alue if e-ercised 4%,%00,000 .arried forBard ' onths to Sept 1 110' Kross proceeds, Sept 1 4%,%)),000 Total net proceeds, after pre iu deduction, Sept 1 4*,'$1,'+) d0 'o nothin$ (remain uncovered , ount of recei6a0le, in euros Endin@ spot e-chan@e rate :4=euro< %000000 333
%000000 333
The oney ar"et hed@e pro6ides the hi@hest certain outco e1 If 8edBall 0elie6es the euro Bill stren@then 6ersus the dollar o6er the co in@ onths, and it is Billin@ to ta"e the currency ris", the put option hed@es could 0e considered1
"ro+lem3G01J5 "i%el:s Financial Metrics0 Transaction e-posure life7span and accountin@ treat ent1 5ays ForBard of ForBard 8ate %10 1&0 $0 '0 777777777
5ate 17Fe0 17Mar 17Cun 17,u@ 17Sep
E6ent Price ?uotation 0y Metrica .ontract si@ned for sale .ontract a ount, pounds Product shipped to Krand Met Product recei6ed 0y Krand Met Krand Met a"es pay ent
Spot 8ate 11+&( 11+*)( R1,000,000 11+)&$ 11+&* 11+%$
ForBard 8ate 11+++1 11+'&1 11+)0% 11+&11 777777777
)nalysis5 a<1 The sale is 0oo"ed at the e-chan@e rate e-istin@ on Cune 1, Bhen the product is shipped to Krand Met, and the ship ent is cate@ori#ed as an account recei6a0le1 This sale is then co pared to that 6alue in effect on the date of cash settle ent, the difference 0ein@ the forei@n e-chan@e @ain :loss<1 Galue as settled 1 illion pounds ` 411+%$0=R 41,+%$,000
Uddin !ra"#ai
1)(
Solution Manual
Galue as 0oo"ed 1 illion pounds ` 411+)&$=R 41,+)&,$00 FT @ain :loss< :4'$,$00< The 6alue of the forei@n e-chan@e @ain :loss< Bill depend upon Bhen Deo actually purchases the forBard contract1 Because any fir s do not define an Qe-posureQ as arisin@ until the date that the product is shipped :loss of physical control o6er the @oods< and the sale is 0oo"ed on the inco e state ent that is a co on date for the purchase of the forBard contract1 For/ard contract purchased on Nune 1 Galue of forBard settle ent 1 illion pounds ` 411+)0%=R DessE Galue as 0oo"ed 1 illion pounds ` 411+)&$=R FT @ain :loss< , ore a@@ressi6e alternati6e is for Deo to purchase the forBard contract contract Bas si@ned, March 1, loc"in@7 in Pi-el2s US dollar settle ent a earlier in the transaction e-posure2s life span1 For/ard contract purchased on March 1 Galue of forBard settle ent 1 illion pounds ` 411+'&1=R DessE Galue as 0oo"ed 1 illion pounds ` 411+)&$=R FT @ain :loss< 41,+)0,%00 41,+)&,$00 :4&,+00< on the date that the ount a full $0 days
41,+'&,100 41,+)&,$00 :4'0,&00<
Jote that in this case if Deo had co6ered forBard on March 1st rather than Cune 1st, the a ount of the forei@n e-chan@e loss Bould ha6e 0een e6en @reater, althou@h Qfully hed@ed1Q The difference is of course the result of the forBard rate chan@in@ Bith spot rates and interest differentials1 "ro+lem3 G0805 Scout Finch and 'ayton Manu!acturin$ () 0 )ssumptions 6alue $07day ,=8 in pounds ',000,000 Spot rate, US4 per pound 11+)% $07day forBard rate, US4 per pound 11+(( '7 onth U1S1 dollar in6est ent rate )100> '7 onth U1S1 dollar 0orroBin@ rate &100> '7 onth UK in6est ent interest rate &100> '7 onth UK 0orroBin@ interest rate 1*100> Put options on the British poundE Stri"e rates, US4=pound 11+( Put option pre iu 11(0> 5ayton2s W,.. 1%100> Scout Finch2s e-pected spot rate in $07days, US4 per pound 11+&(
11+1 1100>
Uddin !ra"#ai
1))
Solution Manual
)lternative 315 (emain Cncovered Galue of ,=8 Bill 0e :' illion pounds - endin@ spot rate :4=pound<< If spot rate is the sa e as current spot rate If endin@ spot rate is the sa e as current forBard rate If endin@ spot rate is the e-pected spot rate )lternative 385 For/ard Contract Bed$e Sell the pounds forBard '7 onths loc"in@ in the forBard rate Pound ,=8 at the forBard rate :pounds - forBard< )lternative 395 Money Mar&et Bed$e 5ayton 0orroBs a@ainst the ,=8, recei6in@ pounds up7front, e-chan@in@ into US41 , ount of ,=8 in $07days, in pounds 5iscount factor, pound 0orroBin@ rate, for '7 onths Proceeds of 0orroBin@, up7front, in pounds E-chan@ed to US4 at current spot rate of US4 recei6ed a@ainst ,=8, up7front US4 need to 0e carried forBard for co parisonE .arry7forBard rate, W,.. for $07days Money Mar"et Aed@e, US4, at end of $07days )lternative 3;5 "ut #ption Bed$es Stri"e 8ate !ption pre iu Jotional principal of option :pounds< Spot rate :4=pound< !ption pre iu , US4 .arry7forBard factor, W,.., for $07days Total pre iu cost, in $07days Proceeds fro put option if e-ercised Dess cost of pre iu , includin@ ti e76alue
(ate (FApound
"roceeds
411+) 411+) 411+$ (ate (FApound
4(,%&),000100 4(,%)(,000100 4(,'((,000100 "roceeds
411+) (ate (FApound
4(,%)(,000100 "roceeds ',000,000100 01$))% %,&$&,((01+%
411+) 4(,10+,%*)1'& 110' 4(,%)0,*)'1++ Stri&e (ate (FApnd 11+1 1100> ',000,000 11+)% 4(%,&)0100 110' 4(*,**(1&0 4(,1'0,000100 7(*,**(1&0
Stri&e (ate (FApnd 11+( 11(0> ',000,000 11+)% 4+$,%$0100 110' 4&1,))&1+0 4(,%(0,000100 7&1,))&1+0
Uddin !ra"#ai
1)+
Solution Manual
Jet proceeds fro
put options, in $07daysE Mini u
4(,1)&,''11'0 411+& 4(,'*+,(00100 7&1,))&1+0 4(,%)(,&'11'0
4(,0+(,((*1%0 411++ 4(,'1$,)00100 7(*,**(1&0 4(,%)(,1(*1%0
Endin@ spot rate needed to 0e superior to forBardE Proceeds fro e-chan@in@ pounds for US4 spot Dess cost of option :alloBed to e-pire !TM< Jet proceeds fro put option, une-ercised
)nalysis5 Scout Finch Bould recei6e the ost certain US4 fro the forBard contract, 4(,%)(,000H the oney ar"et hed@e is less attracti6e as a result of the hi@her 0orroBin@ costs in the UK noB1 The tBo put options yield unattracti6e a ounts77 if they ha6e to 0e e-ercised1 ,s shoBn, the 411+( stri"e price put Bould 0e superior to the forBard if the endin@ spot rate Bere 411+&%( or hi@herH the 411+1 stri"e price Bould 0e superior to the forBard if the endin@ spot rate Bere 411++'% or hi@her1
"ro+lem 3 G0815 Scout Finch and 'ayton Manu!acturin$ (B Solution5 Construction o! 'ayton:s income statement. /it h !orei$n e%chan$e losses and E"S +y strate$y0 E%chan$e (ate )ssumptions Spot e-chan@e rates at 0oo"in@E US dollars per euro US dollars per pound Capanese yen per dollar $07day forBard ratesE US dollars per euro US dollars per pound )ssumption )ssumption 110()0 11($00 1%%1*' 110()0 11($00 1%%1*' )ssumption 110()0 11($00 1%%1*' Payin@ points Payin@ "art c "ositions
110%(0 11(&+(
110%(0 11(&+(
110%(0 11(&+(
Uddin !ra"#ai
1)&
Solution Manual
Capanese yen per dollar Spot rate forecastsE US dollars per euro US dollars per pound Capanese yen per dollar Settle ent spot ratesE US dollars per euro US dollars per pound Capanese yen per dollar E-port sales in currency of in6oiceE Sales in European euros Sales in British pounds Sales in Capanese yen
1%01&( 110))0 11()00 1%)100 7777777777 7777777777 7777777777
1%01&( 110))0 11()00 1%)100 7777777777 7777777777 7777777777
1%01&( 110))0 11()00 1%)100 110*& 11) 1%%1(
points 8ecei6in@ points
%'*0000 R1,+&0,000
%'*0000 R1,+&0,000
%'*0000 R1,+&0,000 1%(,000,000
1%(,000,000 1%(,000,000
(0> FBd .o6er (0> FBd .o6er 100> FBd .o6er
S0 <o0 FP $ains (losses +y sale5 Sales in European euros Sales in British pounds Sales in Capanese yen
c Settled at Settled at For/ards on Forecast For/ard "oints 4%',*00 :4+%,(*0< :4*(,)'0< :4(',*00< :4*,*(0< 4),)+( :4%&,$%&< 41','*$ 41','*$ :4(&,$%&< :4)',)*1< :4%(,)0)< La$e Cncovered Settled at Forecast Cover 41',)%%,%'% 41',)%%,%'% +,'00,000 +,'00,000 ),'%%,%'% ),'%%,%'% 100L For/ard For/ard Cover Based on "oints 41',)%%,%'% +,'00,000 ),'%%,%'%
S0 <o0 Income Statement (CSF Sales 5o estic sales E-port sales
Uddin !ra"#ai
1)$
Solution Manual
Dess cost of @oods sold Kross profit Dess KI, e-penses Dess depreciation Forei@n e-chan@e @ains :losses< EBIT Dess US corporate ta-es Jet inco e Shares outstandin@ Earnin@s per share :EPS<
)(>
7&,&(*,*(1 4*,+)+,+&1 71,%%),001 7%*&,+(0 7(&,$%& 4',%'*,10% 71,%$',)*1 41,$*0,*)1 1,000,000 411$*
7&,&(*,*(1 4*,+)+,+&1 71,%%),001 7%*&,+(0 7)',)*1 4',%%$,'&$ 71,%$1,+(( 41,$'+,)'' 1,000,000 411$*
7&,&(*,*(1 4*,+)+,+&1 71,%%),001 7%*&,+(0 7%(,)0) 4',%)+,*%* 71,'0),$)$ 41,$)0,*(* 1,000,000 411$)
$>
*0>
5ayton2s EPS is hi@hest in part c<, Bhere it deter ined its forBard co6er 0y Bhether it Bould recei6e or pay the forBard points1 In part c<, for 0oth the euro and the pound, 5ayton is payin@ the points, and Bould therefore decide to co6er only (0> of the e-posure Bith forBards :the yen is recei6in@ the points, and is 100> co6ered Bith forBards<1 The forei@n e-chan@e loss for the pound is s aller in part c< 0ecause the pound o6ed in the co pany2s fa6or1 ,lthou@h the euro o6es a@ainst the fir , the loss is not as lar@e as Bhat the forBard Bould ha6e i posed1
"ro+lem 3 G0885 Siam Cement Solution5 ,ssu ptions US dollar de0t ta"en out in Cune 1$$+ US dollar 0orroBin@ rate on de0t Initial spot e-chan@e rate, 0aht=dollar, Cune 1$$+ ,6era@e spot e-chan@e rate, 0aht=dollar, Cune 1$$&
Galue 4(0,000,000 &1*0> %( *%
Calculation o! Forei$n E%chan$e -oss on (epayment o! -oan5 ,t the ti e the loan Bas ac?uired, the scheduled repay ent of dollar and 0aht a ounts Bould ha6e 0een as folloBsE Amou S.No. nt Scheduled (epayment5 8epay ent of US dollar de0tE Principal 4(0,000,000 8epay ent of US dollar de0tE Interest *,%00,000 Total repay ent 4(*,%00,000
Uddin !ra"#ai
1+0
Solution Manual
E-chan@e rate at ti e of repay ent, 0aht=dollar Total repay ent in Thai 0aht Total proceeds fro loan, up7front, in Thai 0aht Jet interest to 0e paid, in Thai 0aht )ctual (epayment5 8epay ent of US dollar de0tE Principal 8epay ent of US dollar de0tE Interest Total repay ent E-chan@e rate at ti e of repay ent, 0aht=dollar Total repay ent in Thai 0aht Dess Bhat Sia had ETPE.TE5 or S.AE5UDE5 to 0e repaid , ount of forei@n e-chan@e loss on de0t
%( 1,'((,000,000 1,%(0,000,000 10(,000,000
4(0,000,000 *,%00,000 4(*,%00,000 *% %,%+),*00,000 71,'((,000,000 $%1,*00,000
"ro+lem 3 G0895 )s/an "ro]ect5 Mitsu+ishi:s E%posure ("art a Mana$in$ a !orei$n currency receiva+le0 )ssumptions )7 onth recei6a0le in E@yptian pounds :ER< Spot rate, ER=4 Spot rate, yen=4 )7 onth forBard rate, yen=4 )7 onth dollar in6estin@ rate )7 onth dollar #ptions on Napanese 6alue yen .all optionE Stri"e rate 1)&,000,000 :yen=4< *1)% Pre iu .all optionE Stri"e rate 1%01)* :yen=4< 11$1)% Pre iu Put optionE Stri"e rate '1*0> :yen=4< $1)0> 6alue 11$ 11(0> 11) 01&0> 1%% 11)0>
Uddin !ra"#ai
1+1
Solution Manual
0orroBin@ rate )7 onth yen in6estin@ rate )7 onth yen 0orroBin@ rate Mitsu0ishi2s cost of capital 11 5o Jothin@ 77 e-chan@in@ at spot rate in )7 onths E-pected pay ent in E@yptian pounds E-pected spot rate, ER=4 E-pected pay ent in 4 in 1&0 days E-pected spot rate, yen=4 Pay ent in yen ,nalysisE Gery 8is"y Bith uncertain e-chan@e rates1 '1 Money ar"et hed@e 77 0orroB a@ainst pay ent E-pected pay ent in E@yptian pounds E-pected spot rate, ER=4 E-pected pay ent in 4 in 1&0 days BorroBin@ rate a@ainst 4 BorroBin@ :discount< factor, 1&07days 5ollar proceeds fro 0orroBin@, noB .urrent spot rate, yen= 4
Pre iu Put optionE Stri"e rate 11%(> :yen=4< )1(0> Pre iu E-pected spot rate in &100> 1&07days, yen=4 %1 ForBard hed@e 77 sell dollars forBard E-pected pay ent in 1)&,000,000 E@yptian pounds
1%* 01$0> 1%%
1)&,000,000
*1)% E-pected spot rate, ER=4 *1)% E-pected pay ent in 4 4'),')',)')1') in 1&0 days 4'),')',)')1') )7 onth forBard rate, 1%% yen=4 11$1)% *,*'),')',)') Pay ent in yen *,'*$,&1&,1&% ,nalysisE Oen=4 e-chan@e rate certainH a ount of e-posure in 4 not1 *1 .all option hed@eE out of the oney stri"e rate :0uyin@ yen< E-pected pay ent in 1)&,000,000 E@yptian pounds 1)&,000,000 *1)% E-pected spot rate, ER=4 *1)% E-pected pay ent in 4 4'),')',)')1') in 1&0 days 4'),')',)')1') $1)0> 01$(*% 4'*,)$&,1%)1'0 1%01)* .all option stri"e rate, yen=4 Proceeds if call option e-ercised 11) *,%1&,1&1,&1&
Uddin !ra"#ai
1+%
Solution Manual
at W,.. for 1&07days !ption pre iu cost, in 1&07days ,nalysisE Oen=4 e-chan@e rate certainH a ount of e-posure in 4 not1 Jet option proceeds, in 1&07days, yen This is a MIJIMUM1 If .all !ption Jot E-ercised Endin@ spot rate, yen=4 !ption e-pires !TME .on6ert 4 to yen spot Dess pre iu carried7 forBard Jet option proceeds, in 1&07days, yen
Oen proceeds, noB Mitsu0ishi carry7 forBard at W,.. for 1&07 days Oen proceeds, 1&07 days fro noB
*,1&(,$&1,$(+
110* *,'(',*%1,%'(
!ption pre iu !ption pre iu , up7 front, in yen Mitsu0ishi carry7 forBard
01&0> '',+*(,*((
110* '(,0$(,%+'
*,1&',0&),(*(
1%% *,*'),')',)') 7'(,0$(,%+' *,*01,%)&,')*
)nalysis5 If yen e-pected to fall in ne-t 1&0 days a@ainst US4H this ay 0e an attracti6e alternati6e1 Final 'iscussion5 If Mitsu0ishi does not Bish to accept any e-chan@e rate ris" it does not ha6e to, it should choose the oney ar"et hed@e1 If Mitsu0ishi Bill accept so e e-chan@e rate ris", and it 0elie6es the yen Bill fall to 1%% or Bea"er 6ersus the dollar, the call option is prefera0le1 8e@ardless, the hed@in@ analysis does not co6er the E@yptian pound to US dollar e-chan@e rate ris", Bhich Bas the pro0le in the end1 "ro+lem 3 G0895 )s/an "ro]ect5 Mitsu+ishi:s E%posure ("art + Post de6aluation, ana@in@ the e-pected pay ent after the initial hed@e is difficult :to say the least<1 )ssumptions )7 onth recei6a0le in E@yptian 6alue )ssumptions 1)&,000,000 Spot rate, ED=4 :pre7 6alue *1)%
Uddin !ra"#ai
1+'
Solution Manual
pounds :ED< Spot rate, yen=4 )7 onth forBard rate, yen=4 E-pected spot rate in 1&0 days, yen=4 10 'o <othin$ 11 e%chan$in$ at spot rate in @1months E-pected pay ent in E@yptian pounds E-pected spot rate, ED=4 E-pected pay ent in 4 in 1&0 days E-pected spot rate, yen=4 Pay ent in yen
de6aluation< Spot rate, ED=4 :post7 1%01)* de6aluation< Percent de6aluation 6ersus 11$1)% the dollar 1%%
(1'( 71'1)(>
1)&,000,000 (1'( 4'1,*01,&)$11) 1%% ',&'1,0%&,0'+
80 For/ard hed$e 11 sell dollars !or/ard E-pected pay ent in E@yptian pounds 1)&,000,000 E-pected spot rate, ED=4 *1)% E-pected pay ent in 4 in 1&0 days 4'),')',)')1') )7 onth forBard rate, yen=4 11$1)% Pay ent in yen *,'*$,&1&,1&%
Mitsu+ishi /ill no/ +e short the di!!erence +et/een the !or/ard a$reement a+ove and the actual settlement in no/ ? months0 , ount of short7fall in US4 , ount of short7fall in yen
Amount :4*,$)1,+)+1%0< :4(1&,+$0,1**1**<
The pro+lems this situation poses !or Mitsu+ishi are comple%0 First, Mitsu0ishi Bould first @o 0ac" to its contracts Bith the ,sBan ProYect and the E@yptian @o6ern ent and push for the @o6ern ent itself to a"e @ood on the full a ount of the ori@inal contract 77 in forei@n currency ter s1 Secondly, if Mitsu0ishi had not hed@ed in Canuary, 0ut left it unco6ered, the 6alue of their e-pected pay ent, all other 6alues held constant, ha6e noB fallen 0y the a ount of the de6aluation, 1'1)*(>1 Third, if Mitsu0ishi had entered into any hed@e a@ree ents in Canuary :forBard, oney ar"et, or option hed@es<, each of those a@ree ents Bould ha6e 0een pre ised on a principal in U1S1 dollars Bhich is noB no lon@er @oin@ to happen1 This Bould ean that for each of the indi6idual hed@es Mitsu0ishi Bould noB 0e QshortQ 1'1)*(> of the deri6ati6e or contract principles1
Uddin !ra"#ai
1+*
Solution Manual
"ro+lem 3 G08;5 )s/an "ro]ect5 Fluor:s E%posure0 "ost devaluation. mana$in$ the currency e%posure0 )ssumptions 91months @1months '7 onth e-pected pay ent, E@yptian pounds (),000,000 **,000,000 Spot rate, ED=4 :pre7 de6aluation< *1)% *1)% E-pected US dollar proceeds 41%,1%1,%1%11% 4$,(%',&0$1(% )ssumptions Fluor2s W,.. ForBard insurance a@ree ent ran@e ForBard insurance a@ree ent pre iu Spot rate, ED=4 :post7de6aluation< Percent de6aluation 6ersus the dollar ,ctual spot rate at '7 onth settle ent a0 =hat /as the cost o! the !or/ard insurance a$reement> Fluor had e%pected the three CS dollar payments5 .u ulati6e total Percent pre iu .ost up7front paid to JO 0an" 41%,1%1,%1%11% 4$,(%',&0$1(% 4*+,)1$,0*+1)% 01&0> 4'&0,$(%1'&
J1months 1%0,000,000 *1)% 4%(,$+*,0%(1$+ 6alues 101)0> &100> 01&0> (1'( 71'1)(> (1(&
4%(,$+*,0%(1$ +
+0 =hat /as the actual CSF proceeds to Fluor /ith !or/ard a$reement less allocated premium> E-pected US dollar pay ent ForBard a@ree ent pre iu Pre iu paid on '7 onth pay ent '7 onth pay ent, E@yptian pounds ,ctual e-chan@e rate at '7 onth settle ent :ED=4< 41%,1%1,%1%11 % 01&0> 4$),$)$1+0 (),000,000 (1(&
Uddin !ra"#ai
1+(
Solution Manual
,ctual cash settle ent, US4 Kain :loss< on e-pected settle ent ForBard a@ree ent settles one7half difference Final settle entE ,ctual 7 Pre iu ; ForBard
410,0'(,&*%1% $ :4%,0&(,')$1&' < :41,0*%,)&*1$1 < 410,$&1,((+1( 1
Fluor Bas Bise to ta"e out the forBard insurance a@ree ent, e6en for Bhat Bas considered a fi-ed e-chan@e rate1 The history of the E@yptian pound in the past * years had 0een a series of periodic de6aluations1 ,lthou@h the a@ree ent did not fully co pensate Fluor, @i6en the no inal cost up7front, the a@ree ent sa6ed Fluor 41,0*%,)&( on the '7 onth pay ent alone1
"ro+lem 3 G08?5 )s/an "ro]ect5 'aSilva:s Contin$ency -ever0 "rice *uotes and e%chan$e rate contin$encies daSilva:s E%pected & Bud$eted '7 onth e-pected pay ent, E@yptian pounds Spot rate, ED=4 :pre7 de6aluation< E-pected US dollar proceeds Bud@eted spot rate, Bra#ilian real=4 91months %&,000,000 *1)% 4),0)0,)0)10) '1( @1months )),000,000 *1)% 41*,%&(,+1*1%$ '1( J1months %*,000,000 *1)% 4(,1$*,&0(11$ '1(
Uddin !ra"#ai
1+)
Solution Manual
Bud@eted Bra#ilian real proceeds Dess contin@ency of Bud@eted proceeds, Bithout contin@ency Final !utco e '7 onth pay ent, E@yptian pounds Spot rate, ED=4 E-pected US dollar proceeds ,ctual spot rate, Bra#ilian real=4 E-pected Bra#ilian real proceeds ,ctual de6aluation of E@yptian pnd :effecti6e< ,ctual 6ersus 0ud@et :contin@ency re o6ed<
%1,%1%,1%11%1 71)100> 84 1+,&1&,1&11&% '7 onths %&,000,000 (1(& 4(,01+,$%111( '1( 84 1+,()%,+%*101 71+1%0> 7',)*$,'$+
(0,000,000100 71)100> 84 *%,000,000100 )7 onths )),000,000 )1% 410,)*(,1)11%$ '1) 84 '&,'%%,(&01)( 7%(1(0> 711,)++,*1$
1&,1&1,&1&11& 71)100> 84 1(,%+%,+%+1%+ $7 onths %*,000,000 )1% 4',&+0,$)+1+* '1+ 84 1*,'%%,(&01)( 7%(1(0> 7',&($,%'&
E6en Bith the de6aluation contin@ency 0uilt into the contract, the actual E@yptian pound rates pro6ed to 0e Borse than the 1)> contin@ency1 ,lthou@h the @radual Bea"enin@ of the Bra#ilian real 6ersus the dollar helped the co pany, it Bas not enou@h to outBei@h the de@ree of pound de6aluation1
Chapter-9
Uddin !ra"#ai
1++
Solution Manual
#peratin$ E%posure
Chapter 3 J #peratin$ E%posure

"ro+lem J01 Carlton Germany 1 Case ;
.ash ,ccounts recei6a0le In6entory Jet plant and e?uip ent Total Balance Sheet In!ormation. End o! Fiscal 8008 )ssets -ia+ilities and net /orth L 1,)00,000 ,ccounts paya0le ',%00,000 Short7ter 0an" loan %,*00,000 Don@7ter de0t *,&00,000 .o on stoc" 8etained earnin@s L 1%,000,000 Total L &00,000 1,)00,000 1,)00,000 1,&00,000 ),%00,000 L 1%,000,000
Important (atios to +e Maintained and #ther 'ata
Uddin !ra"#ai
1+&
Solution Manual
,ccounts recei6a0le, as percent of sales In6entory, as percent of annual direct costs .ost of capital :annual discount rate< Inco e ta- rate )ssumptions E-chan@e rate, 4=L Sales 6olu e :units< E-port sales 6olu e :case *< Sales price per unit E-port sales price per unit :case *< 5irect cost per unit )ssumptions 5irect cost of @oods sold .ash operatin@ e-penses :fi-ed< 5epreciation Preta- profit Inco e ta- e-pense Profit after ta,dd 0ac" depreciation .ash floB fro operations, in euros .ash floB fro operations, in dollars Base Case 11% 1,000,000 1%1& Case 1 1 1,000,000 1%1& Case 8 1 %,000,000 1%1& Case 9 1 1,000,000 1(1')
%(100> %(100> %0100> '*100> Case ; 1 (00,000 (00,000 1%1& 1(1') $1) Case ; $,)00,000 &$0,000 )00,000 L %,$$0,000 1,01),)00 L 1,$+',*00 @00.000 I 8.?E9.;00 F8.?E9.;00
$1) Base Case $,)00,000 &$0,000 )00,000 L 1,+10,000 (&1,*00 L 1,1%&,)00 @00.000 L 1,+%&,)00 4%,0+*,'%0
$1)
$1)
$1) Case 9 $,)00,000 &$0,000 )00,000 L *,%+0,000 1,*(1,&00 L %,&1&,%00 @00.000 L ',*1&,%00 4',*1&,%00
Cash Flo/s +e!ore )d]ustments Case 1 Case 8 $,)00,000 1$,%00,000 &$0,000 )00,000 L 1,+10,000 (&1,*00 L 1,1%&,)00 @00.000 L 1,+%&,)00 41,+%&,)00 &$0,000 )00,000 L *,$10,000 1,))$,*00 L ',%*0,)00 @00.000 L ',&*0,)00 4',&*0,)00
)d]ustments to =or&in$ Capital !or 8009 and 800E Caused +y Chan$es in Conditions )ssumptions ,ccounts recei6a0le In6entory Su .han@e fro 0ase conditions in %00' Base Case L ',%00,000 %,*00,000 L (,)00,000 L 7 Case 1 L ',%00,000 %,*00,000 L (,)00,000 Case 8 L ),*00,000 *,&00,000 L 11,%00,000 Case 9 L ',&*0,000 %,*00,000 L ),%*0,000 L )*0,000 Case ; L ',(%0,000 %,*00,000 L (,$%0,000 I 980.000
L 7 L (,)00,000 Mear1End Cash Flo/s Case 1 41,+%&,)00 41,+%&,)00 41,+%&,)00 41,+%&,)00 41,+%&,)00 Case 8 :41,+($,*00< 4',&*0,)00 4',&*0,)00 4',&*0,)00 4$,**0,)00
Mear 1 :%00'< % :%00*< ' :%00(< * :%00)< ( :%00+<
Base Case 4%,0+*,'%0 4%,0+*,'%0 4%,0+*,'%0 4%,0+*,'%0 4%,0+*,'%0
Case 9 4%,++&,%00 4',*1&,%00 4',*1&,%00 4',*1&,%00 4*,0(&,%00
Case ; 4%,%(',*00 4%,(+',*00 4%,(+',*00 4%,(+',*00 4%,&$',*00
Uddin !ra"#ai
1+$
Solution Manual
Chan$e in Mear1End Cash Flo/s !rom Base Conditions Mear 1 :%00'< % :%00*< ' :%00(< * :%00)< ( :%00+< Base Case Case 1 Case 8 Case 9 na :4'*(,+%0< :4',&'',+%0< 4+0',&&0 na :4'*(,+%0< 41,+)),%&0 41,'*',&&0 na :4'*(,+%0< 41,+)),%&0 41,'*',&&0 na :4'*(,+%0< 41,+)),%&0 41,'*',&&0 na :4'*(,+%0< 4+,')),%&0 41,$&',&&0 "resent 6alue o! Incremental Mear1End Cash Flo/s na (F1.099.J1; F8.G@@.10@ F9.E;8.GJ8 Case ; 41+$,0&0 4*$$,0&0 4*$$,0&0 4*$$,0&0 4&1$,0&0 F1.9?;.;GJ
"ro+lem J08 Carlton Germany 1 Case ?

)ssets .ash ,ccounts recei6a0le In6entory Jet plant and e?uip ent Sum Balance Sheet In!ormation. End o! Fiscal 8008 -ia+ilities and net /orth L 1,)00,000 ,ccounts paya0le L &00,000 ',%00,000 Short7ter 0an" loan 1,)00,000 %,*00,000 Don@7ter de0t 1,)00,000 *,&00,000 .o on stoc" 1,&00,000 8etained earnin@s ),%00,000 I 18.000.000 Sum I 18.000.000
Important (atios to +e Maintained and #ther 'ata ,ccounts recei6a0le, as percent of sales In6entory, as percent of annual direct costs .ost of capital :annual discount rate< Inco e ta- rate )ssumptions Exchange rate, $/ Sales volume (units) Export sales volume (case ) Sales price per unit Export sales price per unit (case ) $irect cost per unit E-chan@e rate, 4=L Sales 6olu e :units< )ssumptions Sales re6enue Base Case 1.2 1,000,00 0 Case 1 1 1,000,0 00 Case 8 1 2,000,00 0 1 1,000,000 %(100> %(100> %0100> '*100> Case 9 1 500,000 500,000 12.! 12.! 12.! 15."# 15."# 15."# %.# 11% 1,000,000 %.# 1 1,000,000 %.# 1 %,000,000 %.# 1 1,000,000 11.52 1 (00,000 Case ; L 1(,')0,000 Case ;
)nnual Cash Flo/s +e!ore )d]ustments Base Case Case 1 Case 8 Case 9 L 1%,&00,000 L L L 1%,&00,000 %(,)00,000 1(,')0,00
Uddin !ra"#ai
1&0
Solution Manual
0 5irect cost of @oods sold .ash operatin@ e-penses :fi-ed< 5epreciation Preta- profit Inco e ta- e-pense Profit after ta,dd 0ac" depreciation .ash floB fro operations, in euros .ash floB fro operations, in dollars $,)00,000 &$0,000 )00,000 L 1,+10,000 (&1,*00 L 1,1%&,)00 )00,000 L 1,+%&,)00 4%,0+*,'%0 $,)00,000 &$0,000 )00,000 L 1,+10,000 (&1,*00 L 1,1%&,)00 )00,000 L 1,+%&,)00 41,+%&,)00 1$,%00,000 &$0,000 )00,000 L *,$10,000 1,))$,*00 L ',%*0,)00 )00,000 L ',&*0,)00 4',&*0,)00 $,)00,000 &$0,000 )00,000 L *,%+0,000 1,*(1,&00 L %,&1&,%00 )00,000 L ',*1&,%00 4',*1&,%0 0 11,(%0,000 1,0)&,000 )00,000 L %,1+%,000 +'&,*&0 L 1,*'',(%0 )00,000 I 8.099.?80 F8.099.?80
)d]ustments to =or&in$ Capital !or 8009 and 800E Caused +y Chan$es in Conditions )ssumptions ,ccounts recei6a0le In6entory Su .han@e fro 0ase conditions in %00' Base Case L ',%00,000 %,*00,000 L (,)00,000 L 7 Case 1 L ',%00,000 %,*00,000 L (,)00,000 L 7 Case 8 L ),*00,000 *,&00,000 L 11,%00,000 L (,)00,000 Case 9 L ',&*0,000 %,*00,000 L ),%*0,000 L )*0,000 Case ; L ',&*0,000 %,&&0,000 L ),+%0,000 I 1.180.000
Mear1End Cash Flo/s Mear 1 :%00'< % :%00*< ' :%00(< * :%00)< ( :%00+< Base Case 4%,0+*,'%0 4%,0+*,'%0 4%,0+*,'%0 4%,0+*,'%0 4%,0+*,'%0 Case 1 41,+%&,)00 41,+%&,)00 41,+%&,)00 41,+%&,)00 41,+%&,)00 Case 8 :41,+($,*00< 4',&*0,)00 4',&*0,)00 4',&*0,)00 4$,**0,)00 Case 9 4%,++&,%00 4',*1&,%00 4',*1&,%00 4',*1&,%00 4*,0(&,%00 Case ; 4$1',(%0 4%,0'',(%0 4%,0'',(%0 4%,0'',(%0 4',1(',(%0
Chan$e in Mear1End Cash Flo/s !rom Base Conditions Mear 1 :%00'< % :%00*< ' :%00(< * :%00)< ( :%00+< Base Case Case 1 Case 8 Case 9 na :4'*(,+%0< :4',&'',+%0< 4+0',&&0 na :4'*(,+%0< 41,+)),%&0 41,'*',&&0 na :4'*(,+%0< 41,+)),%&0 41,'*',&&0 na :4'*(,+%0< 41,+)),%&0 41,'*',&&0 na :4'*(,+%0< 4+,')),%&0 41,$&',&&0 "resent 6alue o! Incremental Mear1End Cash Flo/s na (F1.099.J1; F8.G@@.10@ F9.E;8.GJ8 Case ; :41,1)0,&00< :4*0,&00< :4*0,&00< :4*0,&00< 41,0+$,%00 (F@0?.8;E
Uddin !ra"#ai
1&1
Solution Manual
"ro+lem J09 'enver "lum+in$ Company () Solution5

)ssumptions Sales 6olu e per year US dollar price per unit 5irect costs as > of US4 sales price 5irect costs per unit Spot e-chan@e rate, 8 0=4 E-pected spot rate, 8 0=4 Unit 6olu e decrease if price increased 6alues 1.000.000 F8;000 E?L F1G000 G08 10 110L
S.No. Sales to China US dollar price per unit Unit 6olu e Sales re6enue, 8 0 Dess direct costs Kross profits, 8 0
Case 1 Same (m+ "rice F1J0@G 1.000.000 F1J.@G0.000 11G.000.000 F1.@G0.000
Case 8 Same CSF "rice F8;000 J00.000 F81.@00.000 11@.800.000 F?.;00.000 Better0
"ro+lem J0; 'enver "lum+in$ Company (B 0

)ssumptions Sales 6olu e per year US dollar price per unit 5irect costs as > of US4 price 5irect costs per unit Spot e-chan@e rate, 8 0=4 E-pected spot rate, 8 0=4 6alues 1.000.000 F8;000 E?L F1G000 G08 10 )ssumptions Golu e chan@e :if price increased< Golu e @roBth :sa e 8 0 price< W,.. 6alues 1L 18L 10L
)lternative 15 Weep Same Chinese Sales "rice Mear 6olume (evenue 'irect Costs Gross Mar$in "resent 6alue "resent 6alue o!
Uddin !ra"#ai
1&%
Solution Manual
1 % ' * ( ) + & Cum "6 o! Gross Mar$in
1,000,000 1,1%0,000 1,%(*,*00 1,*0*,$%& 1,(+',(1$ 1,+)%,'*% 1,$+',&%' %,%10,)&1
41$,)&0,000 4%%,0*1,)00 4%*,)&),($% 4%+,)*&,$&' 4'0,$)),&)1 4'*,)&%,&&* 4'&,&**,&'0 4*',(0),%10
41&,000,000 4%0,1)0,000 4%%,(+$,%00 4%(,%&&,+0* 4%&,'%','*& 4'1,+%%,1(0 4'(,(%&,&0& 4'$,+$%,%)(
41,)&0,000 41,&&1,)00 4%,10+,'$% 4%,')0,%+$ 4%,)*',(1' 4%,$)0,+'* 4','1),0%% 4',+1',$*(
Factor 01$0$1 01&%)* 01+(1' 01)&' 01)%0$ 01()*( 01(1'% 01*))(
Mar$in 41,(%+,%+' 41,(((,0*1 41,(&','1( 41,)1%,10% 41,)*1,*1' 41,)+1,%(+ 41,+01,)** 41,+'%,(&' F19.08;.@8G
)lternative 85 (aise Chinese Sales "rice "resent 6alue Factor 01$0$1 01&%)* 01+(1' 01)&' 01)%0$ 01()*( 01(1'% 01*))( "resent 6alue o! Mar$in 4*,$0$,0$1 4*,(0+,*'& 4*,1'&,)*& 4',&00,0'1 4',*&$,11$ 4',%0',)*) 4%,$*1,(%$ 4%,+00,&($ F8J.@J0.9@1
Mear 1 % ' * ( ) + & Cum "6 o! Gross Mar$in
6olume $00,000 $0$,000 $1&,0$0 $%+,%+1 $'),(** $*(,$0$ $((,')& $)*,$%%
(evenue 4%1,)00,000 4%1,&1),000 4%%,0'*,1)0 4%%,%(*,(0% 4%%,*++,0*+ 4%%,+01,&1+ 4%%,$%&,&'( 4%',1(&,1%*
'irect Costs 41),%00,000 41),')%,000 41),(%(,)%0 41),)$0,&+) 41),&(+,+&( 41+,0%),')' 41+,1$),)%) 41+,')&,($'
Gross Mar$in 4(,*00,000 4(,*(*,000 4(,(0&,(*0 4(,()',)%( 4(,)1$,%)% 4(,)+(,*(* 4(,+'%,%0$ 4(,+&$,('1
5en6er Plu 0in@ is uch 0etter off raisin@ the .hinese sales price to aintain the US dollar price, and sufferin@ the loBer 6olu es1 The 6olu e decrease does not offset the stron@er US dollar price per unit receie6ed "ro+lem 3J0? Ba/aiian Macadamia <uts0 a0 Bo/ much should Ba/aiian Macadamia <uts (BM< +orro/ in yen> AMJ recei6es cash collections of one hundred illion yen per onth1 This is the source of repay ent of any 0alance sheet hed@e1 If AMJ Bants to 0e co6ered for one year at a ti e, it Bould need to 0orroB one year2s cash floB plus interest, and con6ert the 0orroBed yen to US dollar at once1 , sa ple calculation Bould 0eE Sample 6alues 100,000,000 1%
S0 <o0 !ne onth2s cash floB Months per year
Cnits Oen
Uddin !ra"#ai
1&'
Solution Manual
!ne year2s cash floB Plus interest Principal and interest Spot e-chan@e rate US dollars
1,%00,000,000 *100> 1,%*&,000,000 1%( 4$,$&*,000
Oen per annu Oen Oen=US4 US4
8ealistically, AMJ Bould pro0a0ly Bant to 0e co6ered for the lon@ ter 1 In that case, the 11% 0illion yen loan could 0e structured so that it could 0e reneBed annually Bith interest reset annually1 This Bould only co6er the forei@n e-chan@e and interest rate ris" for a year at a ti e, 0ut Bould pro0a0ly 0e accepta0le to a 0an" lender1 ,lso un"noBn are the e-pected sales for year % and 0eyond1 +0 =hat should +e the terms o! payment on the loan> The loan should 0e repaid out of the onthly cash floB, Bith pay ents on principal only1 The interest pay ent one year hence has already 0een co6ered 0y 0orroBin@ 0oth principal and interest up7front1 <ote5 AMJ should not 0orroB %(0 illion yen to co6er only its 0alance sheet e-posure1 Such a loan Bould co6er only the accountin@ e-posure, and not the cash floB e-posure :operatin@ e-posure<1 "ro+lem J0@ Cellini Fashion/ear0 The use of ris"7sharin@ a@ree ents1 a0 I! the e%chan$e rate chan$es immediately to "s@000AF. /hat /ill +e the dollar cost o! @ months o! imports to Cellini Fashion/ear> The alloBa0le ran@e of e-chan@e rates is :Ps=4< !utside of this ran@e the tradin@ partners Bill share the e-tra ris" e?ually1 JeB e-chan@e rate :Ps=4< ) ,lloBa0le e-chan@e rate :Ps=4< *1( 5ifference to 0e shared :Ps=4< 11( .ellini2s share 01+( Boselli2s share 01+( Therefore, .ellini Bill use the folloBin@ effecti6e e-chan@e rate after ris"7sharin@E Bottom '1( Top *1(
Uddin !ra"#ai
1&*
Solution Manual
Top of ran@e *1( .ellini2s share 01+( Effecti6e total of ris"7sharin@ (1%( ,ssu in@ that ) onths of i ports Bill still 0e :Ps< &,000,000 Effecti6e e-chan@e rate for .ellini :Ps=4< (1%( .ellini2s cost in US dollars 41,(%',&0$1(% AoBe6er, the loBer cost of i portin@ i@ht lead to hi@her .ellini sales and therefore a hi@her i port total than Ps & illion1 +0 )t "s@000AF. /hat /ill +e the peso e%port sales in Boselli -eather $oods to Cellini Fashion/ear> The e-port sales of Boselli Bould re ain at Ps & illion, unless the loBer dollar cost encoura@es .ellini to i port ore fro Boselli1 "ro+lem J0E )utocars. -td0 )ssumptions In6oice price of car Spot e-chan@e rate, J_4=R 8is"7sharin@ 0and, percenta@e 6alues R1%,000 11)* (100> -o/er Band 11+%%
Sales to <e/ ^ealand 'istri+utors a0 =hat are the outside ran$es> :initial spot rate ; or 7 (>< +0 Cost to the Wi/i distri+utor !or 10 cars JeB current spot rate :J4=R< Is this Bithin the 0and3 .ost of 10 cars at this e-chan@e rate :J_4< 8eceipts to ,utocar in British pounds :Within the 0and ,utocar recei6es R1%,000=car, as e-pected< c0 Cost to the Wi/i distri+utor !or 10 cars
Cpper Band 11((&
11+ Oes %0*,000 R1%0,000
Uddin !ra"#ai
1&(
Solution Manual
JeB current spot rate :J4=R< 911)( Is this Bithin the 0and3 9 Oes .ost of 10 cars at this e-chan@e rate :J_4< 9 1$&,000 8eceipts to ,utocars in British pounds 9 R1%0,000 :Within the 0and ,utocars recei6es R1%,000=car< d0 Bo/ does this shi!t the currency ris&> The ,utocars 0ears no ris" Bithin the (> ran@e1 The distri0utor carries all of the ris" Bithin (>1If the e-chan@e rate falls outside the (> ran@e, ,utocars shares the ris" Bith distri0utor1 e0 =ho +ene!its !rom this ris&1sharin$ a$reement> Both parties are in practice of ris"7sharin@ a@ree ent1 The anufacturer has predicta0le re6enues Bithin the ran@e, Bhile the distri0utor 0ears a oderate le6el of currency ris" Bithin the (> ran@e1 The distri0utor Bill hopefully 0e a0le to pro6ide a ore sta0le pricin@ to pass on to the custo er, Bhich Bill also 0enefit the anufacturer throu@h a ore sta0le and sustaina0le distri0utor sales outlet1 "ro+lem J0G Bi$h1"ro!ile "rinters. Inc0 () Pricin@ decisions in forei@n ar"ets e-periencin@ de6aluations1 "rices in Bra7ilian reais )&0
E%chan$e CS dollar rate )ssumptions prices % ((FAF H E-istin@ sales price per unit 4%00100 a '1* a If the real falls in 6alue, the neB i plied US4 priceE JeB dollar price if no real price chan@e 41+0100 If the US4 price is chan@ed to "eep US4 price E JeB real price is current US4 price at neB e-chan@e rateE 5irect cost per unit in the US, percent of price 5irect cost per unit in the US Unit 6olu e 4%00100 )0> 41%0100 (0,000 b * b
)&0
* a '1*
&00 *0&
Uddin !ra"#ai
1&)
Solution Manual
5ecrease in unit 6olu e fro price increase JeB loBer unit 6olu e
7%0100> *0,000
)lternative 315 Maintain same price in reais5 Sales re6enue :84)&0 - (0,000 < = :84*1000=4< DessE 5irect costs :US41%0 - (0,000< .ontri0ution ar@in in US dollars )lternative 385 (aise price in reais (and accept lo/er volume 5 Sales re6enue :84&00 - *0,000 < = :84*1000=4< DessE 5irect costs :US41%0 - *0,000< .ontri0ution ar@in in US dollars 4&,000,000 *,&00,000 4',%00,000 4&,(00,000 ),000,000 4%,(00,000
'iscussion5 ,lternati6e S% is prefera0le1 In the short run :one year<, APP Bould 0e 0etter off to increase its sales price in reais in Bra#il and accept the loBer sales 6olu e1 The contri0ution ar@in if real prices are raised is 4',%00,000, Bhereas if the price in reais is left unchan@ed APP2s contri0ution ar@in is only 4%,(00,0001 This is a short7 run solution, and does not consider possi0le lon@er7run effects that i@ht co e fro raisin@ the local price and=or acceptin@ a s aller ar"et share1 "ro+lem3 J0J5 Bi$h1"ro!ile "rinters. Inc0 (B Pricin@ decisions on e-port sales Bhen forei@n currency deno inated sales fro real price chan@es1 )ssumptions 6alue Initial sales 6olu e (0,000 Sales 6olu e @roBth 10> Sales price, US4 41+0100 5irect cost per unit 41%0100 ay decline
,lternati6e S1E Maintain current Bra#ilian sales price and 6olu e @roBs 10> per annu
Uddin !ra"#ai
1&+
Solution Manual
End o! year 1 % ' * ( )
Sales volume (0,000 ((,000 )0,(00 )),((0 +',%0( &0,(%)
CSF 'irect (evenue Costs &,(00,000 ),000,000 $,'(0,000 ),)00,000 10,%&(,000 +,%)0,000 11,'1',(00 +,$&),000 1%,***,&(0 &,+&*,)00 1',)&$,''( $,))',0)0
Contri+ution 18L "6 Mar$in Factor %,(00,000 01&$%$ %,+(0,000 01+$+% ',0%(,000 01+11& ','%+,(00 01)'(( ',))0,%(0 01()+* *,0%),%+( 01(0))
"6 %,%'%,1*' %,1$%,%&' %,1(',1'( %,11*,)&) %,0+),$%* %,0'$,&')
"resent value o! contri+ution mar$ins H F18.G0J.00G )ssumptions Initial sales 6olu e Sales 6olu e @roBth Sales price, US4 5irect cost per unit 6alue *0,000 *> 4%00100 41%0100
)lternative 38E 8aise Bra#ilian sales price to 84*00 and 6olu e @roBs only *> per annu fro a loBer 6olu e 0ase1 End o! Sales Mear volume 1 *0,000 % *1,)00 ' *',%)* * **,$$( ( *),+$* ) *&,))) CSF (evenue &,000,000 &,'%0,000 &,)(%,&00 &,$$&,$1% $,'(&,&)& $,+'',%%' 'irect Contri+ution Costs Mar$in *,&00,000 ',%00,000 *,$$%,000 ','%&,000 (,1$1,)&0 ',*)1,1%0 (,'$$,'*+ ',($$,()( (,)1(,'%1 ',+*',(*+ (,&'$,$'* ',&$',%&$ 18L "6 Factor 01&$%$ 01+$+% 01+11& 01)'(( 01()+* 01(0))
"6 %,&(+,1*' %,)(',0)1 %,*)',((+ %,%&+,(&$ %,1%*,1&$ 1,$+%,*)%
"resent value o! contri+ution mar$ins H F1;.9?G.000 )lternative 38, is prefera0le, yieldin@ a hi@her present 6alue of total contri0ution ar@in o6er the e-pected re ainin@ life of the e-port sales1 "ro+lem3 J0105 Bed$in$ Bo$s5 (is&1Sharin$ at Barley 'avidson
Uddin !ra"#ai
1&&
Solution Manual
Solution5
.alculatin@ 0oundaries for ris"7sharin@ a@ree ents is @i6en as underH )ssumption Set Spot rate, central rate, ,4=US4 Fi-ed rate #one, percent fro central rate Sharin@ #one 0oundaries, percent fro central rate 6alue 11%& %1(0> (100>
a0 Fi%ed (ate & (is& Sharin$ ^ones Sharin@ _oneE upper 0oundary Fi-ed rateE upper 0oundary .EJT8,D 8,TE Fi-ed rateE loBer 0oundary Sharin@ _oneE loBer 0oundary 11%1$ 11%*&& 11%& 11'1%& 11'*+* 7%1(0> 7(100> (100> %1(0>
If the spot rate falls 0etBeen the fi-ed rate 0oundaries, 0etBeen ,411%*&&=4 and ,411'1%&=US4, the co pany @uarantees its distri0utors prices in their local currency calculated usin@ the central rate1 If the spot rate falls 0etBeen the fi-ed rate upper 0oundary and the sharin@ #one upper 0oundary, the co pany Bill QshareQ the e-chan@e rate ris" Bith the distri0utor1 It calculates the effecti6e rate as the fi-ed rate upper 0oundary ; :01( - :spot 7 11%1$0<<1 If the spot rate falls 0etBeen the fi-ed rate loBer 0oundary and the sharin@ #one loBer 0oundary, If the spot rate falls 0etBeen the fi-ed rate loBer 0oundary and the sharin@ #one loBer 0oundary, the co pany Bill QshareQ the e-chan@e rate ris" Bith the distri0utor1 It calculates the effecti6e rate the co pany Bill QshareQ the e-chan@e rate ris" Bith the distri0utor1 It calculates the effecti6e rate the co pany Bill QshareQ the e-chan@e rate ris" Bith the distri0utor1 It calculates the effecti6e rate asE cfi-ed rate loBer 0oundary ; :01( - :spot 7 11%1$0<d1 +0 I! Barley ships a ho$ costin$ CSFG.?00. and the spot e%chan$e rate on the
Uddin !ra"#ai
1&$
Solution Manual
order date is )F109;;8ACSF. /hat is the price to the )ustralian dealership> The spot rate falls 0etBeen the fi-ed rate loBer 0oundary and the sharin@ #one loBer 0oundary1This eans that the effecti6e rate is a Qshared rateQE Spot rate, ,4=US4 11'**% Fi-ed rateE loBer 0oundary ,4=US4 11'1%& 5ifference, ,4=US4 010'1* Effecti6e rate 9 loBer 0oundary ; :1( - :difference<< 11'%&( Ao@ price in US4 4&,(00100 Effecti6e e-chan@e rate, ,4=US4 11'%&( Ao@ price to distri0utor, ,4 11,%$%1'* c0 I! Barley ships a ho$ costin$ CSFG.?00. and the spot e%chan$e rate on the order date is )F108;;8ACSF. /hat is the price to the )ustralian dealership> The spot rate falls 0etBeen the central rate and fi-ed rate upper 0oundary, in the #one of fi-ed rate pricin@1 This eans that the effecti6e rate is the central rate1 Ao@ price in US4 Effecti6e e-chan@e rate, ,4=US4 Ao@ price to distri0utor, ,4 4&,(00100 11%& 10,&&0100
Uddin !ra"#ai
1$0
Solution Manual
Chapter-10 Translation E%posure or )ccountin$ E%posure
Chapter 3 10
,Translation E%posure or )ccountin$ E%posure4
"ro+lem 3 10015 Carlton Germany () 0
Uddin !ra"#ai
1$1
Solution Manual
Usin@ facts in the chapter for .arlton Ker any, assu e the e-chan@e rate on Canuary %, %00), in E-hi0it 101* dropped in 6alue fro 411%000=L to 401$000=L rather than to 4110000=L1 8ecalculate .arlton Ker anyVs translated 0alance sheet for Canuary %, %00) Bith the neB e-chan@e rate usin@ the current rate ethod1 a 0 What is the a ount of translation @ain or loss3 + 0 Where should it appear in the financial state ents3 Translation Csin$ the Current (ate Method5 euro depreciates !rom F108000Aeuro to F00J000AI0 Nust +e!ore Nust a!ter devaluation devaluation E%chan$e Translated E%chan$e Translated (ate )ccounts (ate )ccounts (FAI CS dollars (FAI CS dollars 11% 41,$%0,000 01$ 41,**0,000 11% ',&*0,000 01$ %,&&0,000 11% %,&&0,000 01$ %,1)0,000 11% (,+)0,000 41*,*00,000 4$)0,000 1,$%0,000 1,$%0,000 %,%$),&00 +,**0,000 (F19@.G00 F1;.;00.000 01$ *,'%0,000 410,&00,000 4+%0,000 1,**0,000 1,**0,000 %,%$),&00 +,**0,000 (F8.?9@.G00 F10.G00.000
)ssets .ash ,=8 In6entory Jet plant I e?uip ent Total -ia+ilities & <et =orth ,=P Short7ter 0an" de0t Don@7ter de0t .o on stoc" 8etained earnin@s .T, account :loss< Total
Euros Statement 1,)00,000 ',%00,000 %,*00,000 *,&00,000 1%,000,000 &00,000 1,)00,000 1,)00,000 1,&00,000 ),%00,000 7 18.000.000
11% 11% 11% 11%+) 11%
01$ 01$ 01$ 11%+) 11%
a 0 The translation @ain :loss< 9 :4%,('),&00< [ 41'),&00 9 :4%*0,000<
Uddin !ra"#ai
1$%
Solution Manual
+ 0 The translation @ain :loss< for the year is added to the 0alance in the .u ulati6e Translation adYust ent account, Bhich is carried as a separate 0alance sheet account Bithin the e?uity section of the consolidated 0alance sheet1 The lsos does not pass throu@h the inco e state ent under the .urrent 8ate Method, in Bhich the currency of the forei@n su0sidiary is local currency functional1 "ro+lem310085 Carlton Germany (B 0 Usin@ facts in the chapter for .arlton Ker any, assu e as in ?uestion .arlton Ker any :,< that the e-chan@e rate on Canuary %, %00), in E-hi0it 101* dropped in 6alue fro 411%000=L to 401$000=L rather than to 4110000=L1 8ecalculate .arlton Ker anyVs translated 0alance sheet for Canuary %, %00) Bith the neB e-chan@e rate usin@ the te poral rate ethod1
Uddin !ra"#ai
1$'
Solution Manual
a0 The translation @ain :loss< 9 :4%*0,000< [ 0 9 :4%*0,000< +0 Under the Te poral Method, the translation loss of 4%*0,000 Bould 0e closed into retained earnin@s throu@h the inco e state ent, rather than as a separate line ite 1 It is shoBn as a separate line ite a0o6e for peda@o@ical purposes only1 ,ctual year7end retained earnin@s Bould 0e 4+,+11,%00 7 4%*0,000 9 4+,*+1,%001 c0 The translation @ain :loss< differs fro the .urrent 8ate Method 0ecause Qe-posed assetsQ under the .urrent 8ate Method are lar@er than under the te poral ethod 0y the a ount of in6entory and net plant I e?uip ent1
"ro+lem310095 Carlton Germany (C 0 Usin@ facts in the chapter for .arlton Ker any, assu e the e-chan@e rate on Canuary %, %00), in E-hi0it 101* appreciated fro 411%000=L to 411(00=L1 .alculate .arlton
Uddin !ra"#ai
1$*
Solution Manual
Ker anyVs translated 0alance sheet for Canuary %, %00) Bith the neB e-chan@e rate usin@ the current rate ethod1
.
Translation Csin$ the Current (ate Method5 euro appreciates !rom F108000Aeuro to F10?000Aeuro0 Nust +e!ore revaluation Nust a!ter revaluation E%chan$e Translated E%chan$e Translated (ate )ccounts (ate )ccounts (FAI CS dollars (FAI CS dollars 11% 41,$%0,000 11( 4%,*00,000 11% ',&*0,000 11( *,&00,000 11% %,&&0,000 11( ',)00,000 11% (,+)0,000 41*,*00,00 0 4$)0,000 1,$%0,000 1,$%0,000 %,%$),&00 +,**0,000 :41'),&00< F1;.;00.00 0 11( +,%00,000 41&,000,000 11( 11( 11( 11%+) 11% 41,%00,000 %,*00,000 %,*00,000 %,%$),&00 +,**0,000 4%,%)',%00 F1G.000.000
)ssets .ash ,=8 In6entory Jet plant I e?uip ent Total Dia0ilities I Jet Worth ,=P Short7ter 0an" de0t Don@7ter de0t .o on stoc" 8etained earnin@s .T, account :loss< Total
Euros Statement 1,)00,000 ',%00,000 %,*00,000 *,&00,000 1%,000,00 0 &00,000 1,)00,000 1,)00,000 1,&00,000 ),%00,000 7 18.000.00 0
11% 11% 11% 11%+) 11%
a0 The translation @ain :loss< 9 4%,%)',%00 ; 41')&00 9 4%,*00,000 +0 The translation @ain for the year is added to the 0alance in the .u ulati6e Translation adYust ent account, Bhich is carried as a separate 0alance sheet account Bithin the e?uity section of the consolidated 0alance sheet1 The @ain does not pass
Uddin !ra"#ai
1$(
Solution Manual
throu@h the inco e state ent under the current rate ethod in Bhich the currency of the forei@n su0sidiary is a local currency functional1 "ro+lem3 100;5 Carlton Germany (' 0 Usin@ facts in the chapter for .arlton Ker any, assu e as in .arlton Ker any :.< that the e-chan@e rate on Canuary %, %00), in E-hi0it 101* appreciated fro 411%000=L to 411(000=L1 .alculate .arlton Ker anyVs translated 0alance sheet for Canuary %, %00) Bith the neB e-chan@e rate usin@ the te poral ethod1 Translation Csin$ the Temporal Method5 euro appreciates !rom F108000Aeuro to F10?000Aeuro0 Nust +e!ore revaluation
Euros E%chan$e (ate Translated )ccounts
Nust a!ter revaluation

E%chan$e (ate Translated )ccounts
)ssets .ash ,=8 In6entory Jet plant I e?uip ent

Total
State ent 1,)00,000 ',%00,000 %,*00,000 *,&00,000

18.000.000
:4=L< :US dollars< 11% 41,$%0,000 11% ',&*0,000 11%1& %,$%',%00 11%+) ),1%*,&00
F1;.G0G.000
:4=L< 11( 11( 11%1& 11%+)
:US dollars< 4%,*00,000 *,&00,000 %,$%',%00 ),1%*,&00

F1@.8;G.000
-ia+ilities & <et =orth ,ccounts paya0le Short7ter 0an" de0t Don@7ter de0t .o on stoc" 8etained earnin@s .T, account :loss< Total
&00,000 1,)00,000 1,)00,000 1,&00,000 ),%00,000 7

18.000.000
11% 11% 11% 11%+) 11%*'+
4$)0,000 1,$%0,000 1,$%0,000 %,%$),&00 +,+11,%00 40

F1;.G0G.000
11( 41,%00,000 11( 11( 11%+) 11%*'+ %,*00,000 %,*00,000 %,%$),&00 +,+11,%00 4%*0,000
F1@.8;G.000
a 0 The Translation @ain :loss< 9 4%*0,000 7 40 9 4%*0,000
Uddin !ra"#ai
1$)
Solution Manual
+ 0 Under the Te poral Method, the translation loss of 4%*0,000 Bould 0e closed into retained earnin@s throu@h the inco e state ent, rather than as a separate line ite 1 It is shoBn as a separate line ite a0o6e for peda@o@ical purposes only1 ,ctual year7end retained earnin@s Bould 0e 4+,+11,%00 7 4%*0,000 9 4+,*+1,%001 c 0 The translation @ain :loss< differs fro the .urrent 8ate Method 0ecause Qe-posed assetsQ under the .urrent 8ate Method are lar@er than under the te poral ethod 0y the a ount of in6entory and net plant I e?uip ent1 "ro+lem3100?5 Montevideo "roducts. S0)0 () 0 Monte6ideo Products, S1,1, is the Uru@uayan su0sidiary of a U1S1 anufacturin@ co pany1 Its 0alance sheet for Canuary 1 folloBs1 The Canuary 1st e-chan@e rate 0etBeen the U1S1 dollar and the peso Uru@uayo :4U< is 4U%0=41 5eter ine Monte6ideoVs contri0ution to the translation e-posure of its parent on Canuary 1, usin@ the current rate ethod
Balance Sheet (thousands o! pesos Cru$uayo. FC )ssets )ssets .ash ,ccounts recei6a0le In6entory Jet plant I e?uip ent -ia+ilities & <et =orth .urrent lia0ilities Don@7ter de0t .apital stoc" 8etained earnin@s E%chan$e (ate (FCACSF )0,000 1%0,000 1%0,000 %*0,000 ?;0.000 '0,000 $0,000 '00,000 1%0,000 ?;0.000 FC E%chan$e (ate (FCACSF %0 %0 %0 %0
%0 %0 1( 1( Nanuary 1st FCACSF
Calculation o! )ccountin$ E%posures5
Uddin !ra"#ai
1$+
Solution Manual
(000s E-posed assets :all assets< (*0,000 DessE e-posed lia0ilities :current Dia0ilities ; de0t< 71%0,000 <et e%posure ;80.000
80000 4%+,000 7),000 F81.000
"ro+lem3100@5 Montevideo "roducts. S0)0 (B 0 .alculate Monte6ideoVs contri0ution to its parentVs translation loss if the e-chan@e rate on 5ece 0er '1st is 4U%%=41 ,ssu e all peso accounts re ain as they Bere at the 0e@innin@ of the year1 Balance Sheet (thousands o! pesos Cru$uayo. FC
Be!ore 'evaluation E%chan $e (ate Translated (FCACS )ccounts CS F dollars )!ter 'evaluation Translate E%chan$e d (ate )ccounts (FCACSF CS dollars
Nanuary 1st (FCACSF
)ssets .ash ,=8 In6entory Jet plant I e?uip ent Total Dia0ilities I Jet Worth ,=P Don@7ter de0t .apital Stoc" 8etained earnin@s .T, account :loss< Total
)0,000 1%0,000 1%0,000 %*0,000 ?;0.000 '0,000 $0,000 '00,000 1%0,000 111 ?;0.000
%0 4 ',000 %0 ),000 %0 ),000 %0 1%,000 48E. 000 %0 4 1,(00 %0 *,(00 %0 1(,000 %0 ),000 777 48E.000
%% 4 %,+%+ %% (,*(( %% (,*(( %% 10,$0$ F8;.?; @ %% 41,')* %% *,0$1 1( (,*(( 1( 10,$0$ (8E8E F8;.?;@
The translation @ain :loss< 9 :%+%+< [ 40 9 :%+%+< But the translation @ain :loss< of e-posed asset I e-posed lia0ilities are @i6en as underH Calculation o! )ccountin$ FC Nanuary 1st Nanuary 1st FCACSF
Uddin !ra"#ai
1$&
Solution Manual
E%posures5 E-posed assets :current assets ; fi-ed assets< DessE e-posed lia0ilities :current Dia0ilities ; Don@ ter de0t< <et e%posure
(000s (*0,000 71%0,000 ;80.000
FCACSF 80000 Be!ore 'evaluation 4%+,000F :),000<FF F81.000
88000 )!ter 'evaluation 4%*,(*)F :(*((<FF F1J.0J1
,lternati6ely, the translation loss arisin@ fro Urua@uayo can 0e found as folloBsE Translation $ain or (loss H )!ter 'evaluation net e%posure U Translation @ain or :loss< 9 41$,0$1 7 4%1,000 Translation @ain or :loss< 9 4 :1,$0$<
the fall in the 6alue of the peso Be!ore 'evaluation net e%posure
<otes5 Be!ore 'evaluation5 FTotal E%posed )ssets H Cash O )A( O Inventory O <et plant & e*uipment Total E-posed ,ssets H 4 ',000 ; 4),000 ; 4),000 ; 4 1%,000 Total E-posed ,ssets H 4%+,000 FFTotal E%posed -ia+ilities H Current -ia+ilities O -on$ term de+t Total E-posed Dia0ilities9 41,(00 ; *(00 Total E-posed Dia0ilities 9 )000 )!ter 'evaluation5 FTotal E%posed )ssets H Cash O )A( O Inventory O <et plant & e*uipment Total E-posed ,ssets H 4%,+%+ ; (,*(( ; (,*(( ; 10,$0$ Total E-posed ,ssets H 4%*,(*) FFTotal E%posed -ia+ilities H Current -ia+ilities O -on$ term de+t Total E-posed Dia0ilities 9 41,')* ; 4*,0$1 Total E-posed Dia0ilities 9 4(*((
Uddin !ra"#ai
1$$
Solution Manual
"ro+lem3100E5 Montevideo "roducts. S0)0 (C 0 .alculate Monte6ideoVs contri0ution to its parentVs translation @ain or loss usin@ the current rate ethod if the e-chan@e rate on 5ece 0er '1 is 4U1%=41 ,ssu e all peso accounts re ain as they Bere at the 0e@innin@ of the year1 Balance Sheet (thousands o! pesos Cru$uayo. FC
Be!ore 'evaluation E%chan $e (ate Translated (FCACS )ccounts CS F dollars )!ter 'evaluation E%chan$e (ate (FCACSF Translated )ccounts CS dollars
Nanuary 1 (FCACSF
st
)ssets .ash ,=8 In6entory Jet plant I e?uip ent Total Dia0ilities I Jet Worth ,=P Don@7ter de0t )0,000 1%0,000 1%0,000 %*0,000 ?;0.000 '0,000 $0,000 '00,000 1%0,000 111 ?;0.000 %0 %0 1( 1( %0 %0 %0 %0 4',000 ), 000 ),000 1%,000 48 E.000 4 1,(00 *,(00 % .apital Stoc" 8etained earnin@s .T, account :@ain or loss< Total 0,000 &,000 +000 48E.000 1( 1( 0,000 &,000 +000 F;?.000 1% 1% F;?.000 %(00 +(00 % 1% 10,000 1% 10,000 1% %0,000 1% 4(,000
The translation @ain :loss< 9 4+000[ 4+000 9 40 But he translation @ain or loss of e-posed asset I e-posed lia0ilities are @i6en as underH
Uddin !ra"#ai
%00
Solution Manual
Calculation o! )ccountin$ E%posures5 E-posed assets :current assets ; fi-ed assets< DessE e-posed lia0ilities :current Dia0ilities ; Don@ ter de0t< <et e%posure
FC (000s (*0,000 71%0,000 ;80.000
Nanuary 1st FCACSF 80000 Be!ore 'evaluation 4%+,000F :),000<FF F81.000
Nanuary 1st FCACSF 88000 )!ter 'evaluation 4*(,000F :10,000< FF F9?.000
,lternati6ely, the translation loss arisin@ fro Urua@uayo can 0e found as folloBsE Translation $ain or (loss H )!ter 'evaluation net e%posure U Translation @ain or :loss< 9 4'(,000 7 4%1,000 Translation @ain or :loss< 9 4 1*,000
the fall in the 6alue of the peso Be!ore 'evaluation net e%posure
<otes5 Be!ore 'evaluation5 FTotal E%posed )ssets H Cash O )A( O Inventory O <et plant & e*uipment Total E-posed ,ssets H 4 ',000 ; 4),000 ; 4),000 ; 4 1%,000 Total E-posed ,ssets H 4%+,000 FFTotal E%posed -ia+ilities H Current -ia+ilities O -on$ term de+t Total E-posed Dia0ilities9 41,(00 ; *(00 Total E-posed Dia0ilities 9 )000 )!ter 'evaluation5 FTotal E%posed )ssets H Cash O )A( O Inventory O <et plant & e*uipment Total E-posed ,ssets H 4(,000 ; 410,000 ; 410,000 ; %0,000 Total E-posed ,ssets H 4*(,000 FFTotal E%posed -ia+ilities H Current -ia+ilities O -on$ term de+t Total E-posed Dia0ilities9 4%(00 ; 4+(00
Uddin !ra"#ai
%01
Solution Manual
Total E-posed Dia0ilities 9 410,000 "ro+lem3100G5 Siam Toys. -td0 () 0 Sia Toys, Dtd1, is the Thai affiliate of a U1S1 toy anufacturer1 Sia Toys anufacture plastic inYection oldin@ e?uip ent for a"in@ toy cars1 Sales are pri arily in the United States and Europe1 Sia ToysV 0alance sheet in thousands of Thai 0ahts :< as of March '1st is as folloBs1 Usin@ the data presented on Sia Toys, assu e that the Thai 0aht dropped in 6alue fro '0=4 to *0=4 0etBeen March '1 and ,pril 11 ,ssu in@ no chan@e in 0alance sheet accounts 0etBeen these tBo days, calculate the @ain or loss fro translation 0y 0oth the current rate ethod and the te poral ethod1 E-plain the translation @ain or loss in ter s of chan@es in the 6alue of e-posed accounts1 T()<S-)TI#< BM TBE CC((E<T ()TE METB#' Be!ore 'evaluation Balance Sheet (thousands
Thai +aht E%chan$e Translated E%chan$e (ate )ccounts (ate Translated )ccounts
)!ter 'evaluation
)ssets .ash ,ccounts recei6a0le In6entory Jet plant I e?uip ent Total -ia+ilities & <et =orth ,ccounts paya0le Ban" loans .o on stoc" 8etained earnin@s .T, account :loss< Total
Statement %*,000 '),000 *&,000 )0,000 1@G.000 1&,000 )0,000 1&,000 +%,000 0 1@G.000
(A/F '0 '0 '0 '0
CS dollars 4&00 1,%00 1,)00 %,000 F?.@00 4)00 %,000 $00 %,100 7 F?.@00
(AAF *0 *0 *0 *0
CS dollars 4)00 $00 1,%00 1,(00 F;.800 4*(0 1,(00 $00 %,100 :4+(0< F;.800
'0 '0 %0 '*
*0 *0 %0 '*
<ote5 5ollar retained earnin@s 0efore de6aluation are the cu ulati6e su of additions to retained earnin@s of all prior years, translated at e-chan@e rates in effect in each of
Uddin !ra"#ai
%0%
Solution Manual
those years1 This cu ulati6e translation account :.T,< loss of4+(0,000 Bould 0e entered into the co pany2s consolidated 0alance sheet under e?uity1 T()<S-)TI#< BM TBE TEM"#()- METB#' Be!ore 'evaluation Balance Sheet (thousands
E%chan$e Thai +aht (ate Translated )ccounts E%chan$e Translated (ate )ccounts
)!ter 'evaluation
)ssets .ash ,ccounts recei6a0le In6entory Jet plant I e?uip ent Total -ia+ilities & <et =orth ,ccounts paya0le Ban" loans .o on stoc" 8etained earnin@s .T, account :loss< Total
Statement %*,000 '),000 *&,000 )0,000 1@G.000 1&,000 )0,000 1&,000 +%,000 0 1@G.000
(AF
'0 '0 '0 %0
CS dollars 4&00 1,%00 1,)00 ',000 F@.@00 4)00 %,000 $00 ',100 7 F@.@00
( AF *0 *0 '0 %0
CS dollars 4)00 $00 1,)00 ',000 F@.100 4*(0 1,(00 $00 ',100 41(0 F@.100
'0 '0 %0 %'
*0 *0 %0 %'
<ote a5 5ollar retained earnin@s 0efore de6aluation are the cu ulati6e su of additions to retained earnin@s of all prior years, translated at e-chan@e rates in effect in each of those years1 <ote +5 8etained earnin@s after de6aluation are translated at the sa e effecti6e rate :see Jote a< as 0efore de6aluation1 The translation @ain of 41(0,000 Bould 0e passed7throu@h to the consolidated inco e state ent1 EP"-)<)TI#< #F 'IFFE(E<T #CTC#ME BM T()<S-)TI#< METB#'#-#GM5 The Te poral Method results in a translation @ain, as opposed to
Uddin !ra"#ai
%0'
Solution Manual
the .T, loss found under the .urrent 8ate Method, 0ecause of the different e-chan@e rates used a@ainst Jet plant I e?uip ent and the in6entory line ite s1 This @ain Bould 0e i possi0le under the .urrent 8ate Method 0ecause ,DD assets are e-posed under that ethod, Bhereas the Te poral Method carries Jet plant I e?uip ent and in6entory at rele6ant historical e-chan@e rates1 "ro+lem3100J5 Siam Toys. -td0 (B 0 Usin@ the ori@inal data pro6ided for Sia Toys, assu e that the Thai 0aht appreciated in 6alue fro B'0=4 to B%(=4 0etBeen March '1 and ,pril 11 ,ssu in@ no chan@e in 0alance sheet accounts 0etBeen those tBo days, calculate the @ain or loss fro translation 0y 0oth the current rate ethod and the te poral ethod1 E-plain the translation @ain or loss in ter s of chan@es in the 6alue of e-posed accounts1 T()<S-)TI#< BM TBE CC((E<T ()TE METB#' Balance Sheet (thousands Be!ore 'evaluation )!ter 'evaluation E%chan$e Translated E%chan$e Translated Thai +aht (ate )ccounts (ate )ccounts )ssets Statement (BahtACSF CS dollars (BahtACSF CS dollars .ash %*,000 '0 4&00 %( 4$)0 ,=8 '),000 '0 1,%00 %( 1,**0 In6entory *&,000 '0 1,)00 %( 1,$%0 Jet plant I e?uip ent )0,000 '0 %,000 %( %,*00 Total 1@G.000 F?.@00 F@.E80 -ia+ilities & <et =orth ,ccounts paya0le 1&,000 '0 4)00 %( 4+%0 Ban" loans )0,000 '0 %,000 %( %,*00 .o on stoc" 1&,000 %0 $00 %0 $00 8etained earnin@s +%,000 '* %,100 '* %,100 .T, account :loss< 0 7 4)00 Total 1@G.000 F?.@00 F@.E80 <ote5 5ollar retained earnin@s 0efore de6aluation are the cu ulati6e su of additions to retained earnin@s of all prior years, translated at e-chan@e rates in effect in each of
Uddin !ra"#ai
%0*
Solution Manual
those years1 This cu ulati6e translation account :.T,< @ain of 4)00,000 Bould 0e entered into the co pany2s consolidated 0alance sheet under e?uity1 T()<S-)TI#< BM TBE TEM"#()- METB#' Balance Sheet (thousands )ssets .ash ,ccounts recei6a0le In6entory Jet plant I e?uip ent Total -ia+ilities & <et =orth ,ccounts paya0le Ban" loans .o on stoc" 8etained earnin@s .T, account :loss< Total )!ter Be!ore 'evaluation 'evaluation E%chan$e Translated E%chan$e Thai +aht (ate )ccounts (ate Statement (BahtACSF CS dollars (BahtACSF %*,000 '0 4&00 %( '),000 *&,000 )0,000 1@G.000 1&,000 )0,000 1&,000 +%,000 0 1@G.000 '0 '0 %0 1,%00 1,)00 ',000 F@.@00 4)00 %,000 $00 ',100 7 F@.@00 %( '0 %0 Translated )ccounts CS dollars 4$)0 1,**0 1,)00 ',000 FE.000 4+%0 %,*00 $00 ',100 (F180 FE.000
'0 '0 %0 %'
%( %( %0 %'
<ote a5 5ollar retained earnin@s 0efore de6aluation are the cu ulati6e su of additions to retained earnin@s of all prior years, translated at e-chan@e rates in effect in each of those years1 <ote +5 8etained earnin@s after de6aluation are translated at the sa e effecti6e rate :see Jote a< as 0efore de6aluation1The translation loss of 41%0,000 Bould 0e passed7throu@h to the consolidated inco e state ent1
Uddin !ra"#ai
%0(
Solution Manual
EP"-)<)TI#< #F 'IFFE(E<T #CTC#ME BM T()<S-)TI#< METB#'#-#GM5 The Te poral Method results in a translation @ain, as opposed to the .T, loss found under the .urrent 8ate Method, 0ecause of the different e-chan@e rates used a@ainst Jet plant I e?uip ent and the in6entory line ite s1 This @ain Bould 0e i possi0le under the .urrent 8ate Method 0ecause ,DD assets are e-posed under that ethod, Bhereas the Te poral Method carries Jet plant I e?uip ent and in6entor at rele6ant historical e-chan@e rates1 "ro+lem3100105 E$yptian In$ot. -td0 E@yptian In@ot, Dtd1, is the E@yptian su0sidiary of Tran Mediterranean ,lu inu , a British ultinational that fashions auto o0ile en@ine 0loc"s fro alu inu 1 Trans7 MediterraneanVs ho e reportin@ currency is the British pound1 E@yptian In@otVs 5ece 0er '1st 0alance sheet is shoBn 0eloB1 ,t the date of this 0alance sheet the e-chan@e rate 0etBeen E@yptian pounds and British pounds sterlin@ Bas eE(1(0=UKe1 a 0 What is E@yptian In@otVs contri0ution to the translation e-posure of Trans7 Mediterranean on 5ece 0er '1st, usin@ the current rate ethod3 + 0 .alculate the translation e-posure loss to Trans7Mediterranean if the e-chan@e rate at the end of the folloBin@ ?uarter is eE)100=e1 ,ssu e all 0alance sheet accounts are the sa e at the end of the ?uarter as they Bere at the 0e@innin@1
Uddin !ra"#ai
%0)
Solution Manual
Balance Sheet o! E$yptian In$ot. -td0 Be!ore E%chan$e (ate )!ter E%chan$e (ate Chan$e Chan$e E%chan$e Translated E%chan$e Translated (ate )ccounts (ate )ccounts (E$yptian (E$yptian -ACWCS dollars -ACWCS dollars (1( 4',000,000 ) 4%,+(0,000 (1( ),000,000 ) (,(00,000 (1( $,000,000 ) &,%(0,000 (1( 1%,000,000 F90.000.00 0 4*,(00,000 $,000,000 1),(00,000 7 F90.000.00 0 ) 11,000,000 F8E.?00.000 ) ) (1( 4*,1%(,000 &,%(0,000 1),(00,000 :41,'+(,000< F8E.?00.000 End o! 2uarter ) 4%+,(00,000 71%,'+(,000
E$yptian pounds )ssets .ash ,=8 In6entory Jet plant I e?uip ent Total Dia0ilities I Jet Worth ,=P Don@7ter de0t In6ested capital .T, account :loss< Total Statement 1),(00,000 '',000,000 *$,(00,000 )),000,000 1@?.000.000 %*,+(0,000 *$,(00,000 $0,+(0,000 7 1@?.000.000
(1( (1( (1(
a0 Calculation o! )ct$ E%posures5 Serial Number E-posed assets :all assets< DessE E-posed Dia0ilities I .urrent Dia0ilities ; de0t< E$yptian pounds 1)(,000,000 7+*,%(0,000 'ec0 91st (1( 4'0,000,000 71',(00,000
Uddin !ra"#ai
%0+
Solution Manual
Jet e-posure + 0 .han@e in translation e-posureE
$0,+(0,000
41),(00,000
41(,1%(,000
Translation Kain :Doss< 9 :41,'+(,000< [ 0 9 :41,'+(,000< ,lternati6ely, the translation loss arisin@ fro Urua@uayo can 0e found as folloBsE Jet e-posed assets :US4< Percenta@e chan@e in the 6alue of the dollar Translation @ain :loss< the fall in the 6alue of the peso 41),(00,000 7&1'0> :41,'+(,000<
Uddin !ra"#ai
%0&
Solution Manual
Chapter-11 Sourcin$ Glo+al E*uity
Uddin !ra"#ai
%0$
Solution Manual
Chapter 3 11 Sourcin$ E*uity Glo+ally

Problem# 11.1: Novos cost of equity prior to April 1980. Solution: Assumptions Danish risk free rate of interest, krf Danish stock market return, km Novos beta before internationalization Calculation: What was Novos cost of equity? ke = krf + (km krf) = 18.00% Values 10.00% 18.00% 1.00
Problem# 11.2: Novos WACC prior to April 1980. Solution: Assumptions Novos cost of debt, kd Novos cost of equity, ke Novos debt to capital ratio, D/V Novos equity to capital ratio, E/V Novos effective tax rate, t Values 12.0% 18.0% 70.0% 30.0% 40.0%
Calculation: What was Novos weighted average cost of capital?

W,.. = :5=G "d :1 [ t<< + :E=G "e< 9 101**>
Uddin !ra"#ai
%10
Solution Manual
b). How did this affect its capital budget? The relatively high debt ratio and the tax shelter of interest led to a modest WACC despite the relatively high cost of equity. Thus the WACC was probably a reasonable hurdle rate for capital investments. However, the bigger problem was that the marginal cost of capital would increase significantly if Novo did not gain access to the liquidity provided by international portfolio investors
Problem# 11.3: Novos cost of equity after July 1981. Assuming the following data now apply, calculate Novos cost of equity. International portfolio investors dominated the trading activity in Novos stock. Most of the volume was executed on the New York Stock Exchange. Therefore we use international norms rather than Danish norms. Assumptions International risk free rate of interest, krf International stock market return, km Novos beta after internationalization What was Novos cost of equity now? ke = krf + (km krf) = 11.20% Values 8.00% 12.00% 0.80
This was a very significant drop from the 18% cost of equity observed before April 1980. Problem# 11.4: Novos WACC after July 1981. Assumptions Novos new cost of debt, kd Novos cost of equity, ke Novos debt to capital ratio, D/V Novos equity to capital ratio, E/V Novos effective tax rate, t Values 10.0% 11.2% 50.0% 50.0% 40.0%
Uddin !ra"#ai
%11
Solution Manual
a). What was Novos weighted average cost of capital? WACC = (D/V kd (1 t)) + (E/V ke) = 8.60% b) How did this affect its capital budget? The lower cost of equity more than offset the lower debt ratio. The WACC was reduced to 8.60% from 10.44%. This created a better hurdle rate for capital investments. Furthermore, access to international portfolio investors improved Novos marginal cost of capital. Both results increased the number of capital projects that could be undertaken by Novo.
Problem# 11.5: Novos cost of equity in 2004. Assumptions International risk free rate of interest, krf International stock market return, km Novos beta after internationalization What was Novos cost of equity now? ke = krf + (km krf) = 7.20% This is a further drop in the cost of equity due to reduction in market expectations & much of the world and lower the interest rates. Values 4.00% 8.00% 0.80
Problem# 11.6: Novos WACC in 2004. Assumptions Novos new cost of debt, kd Novos cost of equity, ke Novos debt to capital ratio, D/V Novos equity to capital ratio, E/V Novos effective tax rate, t Values 6.0% 7.2% 50.0% 50.0% 40.0%
Uddin !ra"#ai
%1%
Solution Manual
a) What was Novos weighted average cost of capital? WACC = (D/V kd (1 t)) + (E/V ke) = 5.40% b) How did this affect its capital budget? Novos lower WACC in early 2004, compared to post-July 1981, was mainly due to lower overall interest rates and required rates of return. Theoretically, Novos lower WACC should lead to even more acceptable capital projects. However, the dismal economic outlook worldwide in early 2004 discouraged firms from investing in capital projects even though they pass the new lower hurdle rate. Problem# 11.7: HangSung before equity issue abroad. Assumptions Korean risk free rate of interest, krf Korean stock market return, km HangSungs beta What was Novos cost of equity now? ke = krf + (km krf) Values 10.00% 14.00% 1.00 = 14.00%
Problem# 11.8: HangSungs WACC before equity issue abroad. Assumptions HangSungs cost of debt, kd HangSungs cost of equity, ke HangSungs debt to capital ratio, D/V HangSungs equity to capital ratio, E/V HangSungs effective tax rate, t What was HangSungs WACC? WACC = (D/V kd (1 t)) + (E/V ke) = 9.52% Problem# 11.9: HangSung after equity issue abroad. Assumptions International risk free rate of interest, krf International stock market return, km HangSungs beta Values 4.00% 8.00% 0.70 Values 12.0% 14.0% 80.0% 20.0% 30.0%
Uddin !ra"#ai
%1'
Solution Manual
What was Novos cost of equity now? ke = krf + (km krf) = 6.80% The cost of equity dropped significantly from 14% to 6.8% after the equity issue abroad. This demonstrates one of the advantages for a firm to internationalize its cost and availability of capital. Problem# 11.10: HangSungs WACC after equity issue abroad. Assumptions HangSungs cost of debt, kd HangSungs cost of equity, ke HangSungs debt to capital ratio, D/V HangSungs equity to capital ratio, E/V HangSungs effective tax rate, t a). What was HangSungs WACC? WACC = (D/V kd (1 t)) + (E/V ke) = 5.24% b) How did this affect its capital budget? HangSungs WACC was lowered from 9.52% before its equity issue abroad to 5.24% aftewards. This should lead to more acceptable capital projects. The equity issue abroad should also increase HangSungs liquidity, thereby leading to a less-steeply increasing marginal cost of capital and still more acceptable capital projects. Values 6.0% 6.8% 60.0% 40.0% 30.0%
Uddin !ra"#ai
%1*
Solution Manual
)nne%ure o! Currencies Csed in Solution Manual S1 Jo1 1 % ' * ( ) + & $ 10 11 1% 1' 1* 1( 1) 1+ 1& 1$ %0 %1 %% %' %* %( %) %+ %& '0 .ountry US, ,ustralia Aon@ Kon@ .anada Bra#il Uru@uay ,f@hanistan Pa"istan India Indonesia Malyshia SBit#erland Europeon Union Iran Thailand .hina 8ussia Ker any Curden Ira? KuBit 5u0ai Saudi ,ra0ia Me-ican Capan UK E@ypt Italy Tur"ey .urrency 5ollar ,ustralian 5ollar Aon@ Kon@ 5ollar .anadian 5ollar 8eais Peso Uru@uayo 8upees = 5ollar 8upees 8upees 8upaya Malaysian 8in@@et SBiss franc Euro 8iyal = To an Bhat Ooan = 8en in0i 8u0le 5eutsche Mar" Cordanian 5iner Ira?i 5iner KuBaiti 5iner 5irha 8iyal Me-ican peso Oen Pound Sterlin@ E@yptian Pound Dira Dira Sy 0ol 4 ,4 AK4 .4 84 4U F 8s1 !r PK8 8s1 8s1 8M SF L 8 O 8 5M C5 I5 K5 5 S8I Ps Z R RE Dit TD
Uddin !ra"#ai
%1(
Solution Manual
6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula
1# !irect Euotation 6ormula for Percenta-e Chan-e 2# :ndirect Euotation 6ormula for Percenta-e Chan-e. 3# !irect Euotation for Premium+!iscount CannumD. $# :ndirect Euotation for Premium+!iscount CannumD.. &# Profit 6ormula *# !eri"ed 6ormula for !irect Euotation for S1 0# !eri"ed 6ormula for !irect Euotation for S2 8# !eri"ed 6ormula for :ndirect Euotation for S1. 9# !eri"ed 6ormula for :ndirect Euotation for S2 . 1## Sale Price in Aordanian !inner CA!D 6ormula 11# Aordanian :m'ort !ut) 6ormula.. 12# 5otal CostG in Aordanian !iner CA!D 6ormula........... 13# Aordanian Resale 6ees 6ormula 1$# Resale Price to :ra/ in A! 6ormula 1&# Price Paid in :ra/i !iner 6ormula 1*# Price Paid in <S !ollar. 10# Current .ccount =alances 6ormula 18# 6inancial .ccount =alances 6ormula. 19# =asic =alances 6ormula.. 2## 1"erall =alances 6ormula.... 21# Mid Rates 6ormula. 22# S'read 4 Percent S'read or Mar-in 6ormula.. 23# 1utri-ht 6or8ard =id Rate 6ormula 2$# 1utri-ht 6or8ard .s% Rate 6ormula 2&# Cross Rate 6ormula.. 2*# .rbitra-e Profit 6ormula.. 20# .rbitra-e Joss 6ormula .
$ $ $ $ $ $ $ $ $ & & & & & & & * * * * 0 0 0 0 0 0 0
Uddin !ra"#ai
%1)
Solution Manual
6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula
28# 29# 3## 31# 32# 33# 3$# 3&# 3*# 30# 38# 39# $## $1# $2# $3# $$# $&# $*# $0# $8# $9# &## &1# &2# &3# &$# &&# &*# &0# &8# &9# *## *1# *2# *3# *$# *&# **# *0# *8#
Balue of Maturit) 6ormula for Jon- Position 8 Balue of Maturit) 6ormula for Short Position.. 8 5otal Balue of Call Premium 6ormula . 8 S'ot Rate Sensiti"it) CdeltaD 6ormula 8 6or8ard Rate Sensiti"it) CdeltaD 6ormula. 5ime to Maturit) CthetaD 6ormula... 3;month 1'tion Price 6ormula for theta.... Sensiti"it) to Bolatilit) ClambdaD 6ormula.. !ail) Bolatilit) 6ormula. Sensiti"it) to Chan-in- M :nterest Rate 6ormula.. Sensiti"it) to Chan-in- 6orei-n :nterest Rate 6ormula =u)er of Call 1'tion: P+JG =,P 4 (ross Profit 6ormula.. =u)er of Put 1'tion: P+JG =,P 4 (ross Profit 6ormula @riter of Call 1'tion: P+JG =,P 4 (ross Profit 6ormula... @riter of Put 1'tion: P+JG =,P 4 (ross Profit 6ormula Ja8 of 1ne Price 6ormula for S8iss 6rance.. Ja8 of 1ne Price 6ormula for <.S. !ollars Ja8 of 1ne Price 4 PPP 6ormula of S6+M and M+S6. Ja8 of 1ne Price 4 ,2chan-e rate 'ass;throu-h S6+M....... Ja8 of 1ne Price 4 ,2chan-e rate 'ass;throu-h M+S6....... .ssumin- 0#O ,2chan-e rate 'ass;throu-h. .ssumin- 1##O ,2chan-e rate 'ass;throu-h Price ,lasticit) of !emand 6ormula. Jocal Currenc) <nder+1"er Baluation formula for M+S6 Jocal Currenc) <nder+1"er Baluation formula for S6+M....... Real+7ominal ,ffecti"e ,2chan-e Rate :nde23s for M............ 6isher ,ffect 6ormula in terms of <S M and S6 :nternational 6isher ,ffect 6ormula#1 .. :nternational 6isher ,ffect 6ormula#2. 6or8ard Rate 6ormula#1CnP9#D . 6or8ard Rate 6ormula#2CnP3*#D .. :nterest Rate Parit) C:RPD 6ormula#1. :nterest Rate Parit) C:RPD 6ormula#2 . Purchasin- Po8er Parit) CPPPD 6ormula C,/uilibriumD ,ffecti"e or :m'lied Cost 6ormula Co"ered+<nco"ered :nterest .rbitra-e Profit 6ormula. Co"ered+<nco"ered :nterest .rbitra-e Joss 6ormula. Miser) :nde2 6ormula... 6or8ard Rate 6ormula for Miser) :nde2es. 6orecastin- of 6or8ard Rate 6ormula for Real :nterest Rates.. :m'lied :nterest Rates 6ormula....
8 8 8 8 8 8 8 9 9 9 9 1# 1# 1# 1# 1# 1# 1# 1# 1# 1# 1# 11 11 11 11 11 11 11 11 11 11 11 12 12 12 12
Uddin !ra"#ai
%1+
Solution Manual
6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula 6ormula
*9# Mean 6ormula.... 0## Jo8er Class =oundaries 6ormula. 01# <''er Class =oundaries 6ormula. 02# 7et ,2'osure 6ormula .. 03# 7et ,2'osure .lternate 6ormula . 0$# Jife S'an of 5ransaction ,2'osure 6ormula.. 0&# =an% Joan C Princi'alD 6ormula.. 0*# Jiabilities and 7et @orth 6ormula.. 00# 6or8ard Proceeds 6ormula.... 08# 3;months 9# da)s :n"estment Rate CrD 6ormula 09# .nnual :n"estment Rate CrD 6ormula.. 8## =rea%e"en :n"estment Rate CrD 6ormula 81# S6 7eeded 5oda) 6ormula. 82# 5otal Cost of Mone) Mar%et Fed-e 6ormula 83# 5otal Cost of Call 1'tion Fed-e 6ormula. 8$# 6Q (ain+Joss 6ormula. 8&# 5otal Sales 6ormula. 8*# 5otal Re'a)ment in <S M 6ormula. 80# 6ord3s Pa)ments in <S M CRis%;sharin- .-reementD.. 88# 6ord3s Cost in <S M 6ormula.. 89# 6ord3s Sa"in-s in <S M 6ormula 9## Cost of ,/uit) 6ormula CC.PMD 91# @ei-hted ."era-e Cost of Ca'ital C@.CCD 6ormula 92# 5otal Percenta-e Cost of Ca'ital 6ormula... 93# .fter;ta2 Cost of !ebt in S6 6ormula..
12 12 12 13 13 13 13 13 13 13 13 13 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$
Uddin !ra"#ai
%1&
Solution Manual
Uddin !ra"#ai
%1$
Solution Manual
Uddin !ra"#ai
%%0
Solution Manual
Uddin !ra"#ai
%%1
Solution Manual
Uddin !ra"#ai
%%%
Solution Manual
Uddin !ra"#ai
%%'
Solution Manual
Uddin !ra"#ai
%%*
Solution Manual
Uddin !ra"#ai
%%(
Solution Manual
Uddin !ra"#ai
%%)
Solution Manual
Uddin !ra"#ai
%%+
Solution Manual
Uddin !ra"#ai
%%&
Solution Manual
Uddin !ra"#ai
%%$

Multinational Business Finance Solution Manual 12th Edition by Etiman Stone Hill Moffitt Prepared by Wasim Orakzai IM Sciences KUST ISBN 0 321 1789

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Multinational Business Finance Solution Manual 12th Edition by Etiman Stone Hill Moffitt Prepared by Wasim Orakzai IM Sciences KUST ISBN 0 321 1789

Uploaded by

Copyright:

Available Formats

Multinational Business Finance 10th Edition

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

Financial Goals & Corporate Governance

The International Monetary System (IMS

Balance o! "ayments (B#"

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

Forei$n E%chan$e Mar&et (FEM

'( 3* 30 $1 $2 $3 $$ $& $0 $8 $9 &# &1 &$ && &0

Forei$n Currency 'erivatives (FC'

International "arity Conditions (I"C

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

Forei$n E%chan$e (ate 'etermination

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

Translation E%posure ()ccountin$ E%posure

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

19* 198 2## 2#2

Sourcin$ E*uity Glo+ally

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

Financial Goals & Corporate Governance

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

,Financial Goals & Corporate Governance4

)ssumptions Share price, P1 Share price, P% 5i6idend paid, 5%

6alue 4 )%100 4 +*100 4 %1%(

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

100100> 100100> Participacoes,

continues to oBn (&1*&> of the 6otin@ shares in Brasil Teleco

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

Company Phar 7Italy Phar 7US,

"AE <um+er (atio o! shares 10,000,0 %0 00 10,000,0 *0 00

Earnin$s 410,000,000 410,000,000

E"S 41100 41100

Total Mar&et 6alue 4%00,000,000 4*00,000,000

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

P=E - .onsolidated earnin@s 9 *0 - 4%0,000,000 9 4&00,000,0001

Phar 7Italy %0 Phar 7US, *0

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

ar"et 6alue plus a illion=4%0

"ro+lem 3 10G5 Solution5 S0<o0

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

4 +,'&(1$' )(0 100 4 111') '$1)> )01*> 1&11> '$1(> %1&>

CS "arent Company (CSF

Bra7ilian Su+sidiary (reais. (F

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

01$%)00 4%,$%(100 4 +,0&&1'% )( 0100 4111') 41,0*11)+ 4%,$1(1++

IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasi

Multinational Business Finance 10th Edition

9 K ; H? Corporate Income ta%es in F 41,(+(100 4 **)1' 41,$'1&* 4 &&1%*

9M 4 ',+01'$ N 411,$111') 9 '01%0> Effecti6e ta- rate

7,+11 '%1 7,'$0 7*,+11 '%1 710,$%) 0 71(,'1)

8000 7$') ( 7*&%

7&$) )0 71' 7(+$ 7&$) )0 71' +' 1?0@

7$') ( 71+) 7)(& 7$') ( 71+) )) 1?J8