国际财务治理课后习题答.docx

国际财务治理课后习题答.docx

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国际财务治理课后习题答

CHAPTER8MANAGEMENTOFTRANSACTIONEXPOSURE

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMS

QUESTIONS

1.Howwouldyoudefinetransactionexposure?

Howisitdifferentfromeconomicexposure?

Answer:

Transactionexposureisthesensitivityofrealizeddomesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrenciestounexpectedchangesinexchangerates.Unlikeeconomicexposure,transactionexposureiswell-definedandshort-term.

2.Discussandcomparehedgingtransactionexposureusingtheforwardcontractvs.moneymarketinstruments.Whendothealternativehedgingapproachesproducethesameresult?

Answer:

Hedgingtransactionexposurebyaforwardcontractisachievedbysellingorbuyingforeigncurrencyreceivablesorpayablesforward.Ontheotherhand,moneymarkethedgeisachievedbyborrowingorlendingthepresentvalueofforeigncurrencyreceivablesorpayables,therebycreatingoffsettingforeigncurrencypositions.Iftheinterestrateparityisholding,thetwohedgingmethodsareequivalent.

3.Discussandcomparethecostsofhedgingviatheforwardcontractandtheoptionscontract.

Answer:

Thereisnoup-frontcostofhedgingbyforwardcontracts.Inthecaseofoptionshedging,however,hedgersshouldpaythepremiumsforthecontractsup-front.Thecostofforwardhedging,however,mayberealizedexpostwhenthehedgerregretshis/herhedgingdecision.

4.Whataretheadvantagesofacurrencyoptionscontractasahedgingtoolcomparedwiththeforwardcontract?

Answer:

Themainadvantageofusingoptionscontractsforhedgingisthatthehedgercandecidewhethertoexerciseoptionsuponobservingtherealizedfutureexchangerate.Optionsthusprovideahedgeagainstexpostregretthatforwardhedgermighthavetosuffer.Hedgerscanonlyeliminatethedownsideriskwhileretainingtheupsidepotential.

5.SupposeyourcompanyhaspurchasedaputoptionontheGermanmarktomanageexchangeexposureassociatedwithanaccountreceivabledenominatedinthatcurrency.Inthiscase,yourcompanycanbesaidtohavean‘insurance’policyonitsreceivable.Explaininwhatsensethisisso.

Answer:

Yourcompanyinthiscaseknowsinadvancethatitwillreceiveacertainminimumdollaramountnomatterwhatmighthappentothe$/€exchangerate.Furthermore,iftheGermanmarkappreciates,yourcompanywillbenefitfromtherisingeuro.

6.RecentsurveysofcorporateexchangeriskmanagementpracticesindicatethatmanyU.S.firmssimplydonothedge.Howwouldyouexplainthisresult?

Answer:

Therecanbemanypossiblereasonsforthis.First,manyfirmsmayfeelthattheyarenotreallyexposedtoexchangeriskduetoproductdiversification,diversifiedmarketsfortheirproducts,etc.Second,firmsmaybeusingself-insuranceagainstexchangerisk.Third,firmsmayfeelthatshareholderscandiversifyexchangeriskthemselves,renderingcorporateriskmanagementunnecessary.

7.Shouldafirmhedge?

Whyorwhynot?

Answer:

Inaperfectcapitalmarket,firmsmaynotneedtohedgeexchangerisk.Butfirmscanaddtotheirvaluebyhedgingifmarketsareimperfect.First,ifmanagementknowsaboutthefirm’sexposurebetterthanshareholders,thefirm,notitsshareholders,shouldhedge.Second,firmsmaybeabletohedgeatalowercost.Third,ifdefaultcostsaresignificant,corporatehedgingcanbejustifiablebecauseitreducestheprobabilityofdefault.Fourth,ifthefirmfacesprogressivetaxes,itcanreducetaxobligationsbyhedgingwhichstabilizescorporateearnings.

8.Usinganexample,discussthepossibleeffectofhedgingonafirm’staxobligations.

Answer:

Onecanuseanexamplesimilartotheonepresentedinthechapter.

9.Explaincontingentexposureanddiscusstheadvantagesofusingcurrencyoptionstomanagethistypeofcurrencyexposure.

Answer:

Companiesmayencounterasituationwheretheymayormaynotfacecurrencyexposure.Inthissituation,companiesneedoptions,notobligations,tobuyorsellagivenamountofforeignexchangetheymayormaynotreceiveorhavetopay.Ifcompanieseitherhedgeusingforwardcontractsordonothedgeatall,theymayfacedefinitecurrencyexposure.

10.Explaincross-hedginganddiscussthefactorsdeterminingitseffectiveness.

Answer:

Cross-hedginginvolveshedgingapositioninoneassetbytakingapositioninanotherasset.Theeffectivenessofcross-hedgingwoulddependonthestrengthandstabilityoftherelationshipbetweenthetwoassets.

PROBLEMS

1.CrayResearchsoldasupercomputertotheMaxPlanckInstituteinGermanyoncreditandinvoiced€10millionpayableinsixmonths.Currently,thesix-monthforwardexchangerateis$€andtheforeignexchangeadvisorforCrayResearchpredictsthatthespotrateislikelytobe$€insixmonths.

（a）Whatistheexpectedgain/lossfromtheforwardhedging?

（b）IfyouwerethefinancialmanagerofCrayResearch,wouldyourecommendhedgingthiseuroreceivable?

Whyorwhynot?

（c）Supposetheforeignexchangeadvisorpredictsthatthefuturespotratewillbethesameastheforwardexchangeratequotedtoday.Wouldyourecommendhedginginthiscase?

Whyorwhynot?

Solution:

（a）Expectedgain（$）=10,000,000–

=10,000,000（.05）

=$500,000.

（b）IwouldrecommendhedgingbecauseCrayResearchcanincreasetheexpecteddollarreceiptby$500,000andalsoeliminatetheexchangerisk.

（c）SinceIeliminateriskwithoutsacrificingdollarreceipt,Istillwouldrecommendhedging.

2.IBMpurchasedcomputerchipsfromNEC,aJapaneseelectronicsconcern,andwasbilled¥250millionpayableinthreemonths.Currently,thespotexchangerateis¥105/$andthethree-monthforwardrateis¥100/$.Thethree-monthmoneymarketinterestrateis8percentperannumintheU.S.and7percentperannuminJapan.ThemanagementofIBMdecidedtousethemoneymarkethedgetodealwiththisyenaccountpayable.

（a）Explaintheprocessofamoneymarkethedgeandcomputethedollarcostofmeetingtheyenobligation.

（b）Conductthecashflowanalysisofthemoneymarkethedge.

Solution:

（a）.Let’sfirstcomputethePVof¥250million,.,

250m/=¥245,700,

SoiftheaboveyenamountisinvestedtodayattheJapaneseinterestrateforthreemonths,thematurityvaluewillbeexactlyequalto¥25millionwhichistheamountofpayable.

Tobuytheaboveyenamounttoday,itwillcost:

$2,340,=¥250,000,000/105.

Thedollarcostofmeetingthisyenobligationis$2,340,asoftoday.

（b）

___________________________________________________________________

TransactionCF0CF1

____________________________________________________________________

1.Buyyensspot-$2,340,

withdollars¥245,700,

2.InvestinJapan-¥245,700,¥250,000,000

3.Payyens-¥250,000,000

Netcashflow-$2,340,

____________________________________________________________________

3.YouplantovisitGeneva,Switzerlandinthreemonthstoattendaninternationalbusinessconference.YouexpecttoincurthetotalcostofSF5,000forlodging,mealsandtransportationduringyourstay.Asoftoday,thespotexchangerateis$SFandthethree-monthforwardrateis$SF.Youcanbuythethree-monthcalloptiononSFwiththeexerciserateof$SFforthepremiumof$perSF.Assumethatyourexpectedfuturespotexchangerateisthesameastheforwardrate.Thethree-monthinterestrateis6percentperannumintheUnitedStatesand4percentperannuminSwitzerland.

（a）CalculateyourexpecteddollarcostofbuyingSF5,000ifyouchoosetohedgeviacalloptiononSF.

（b）CalculatethefuturedollarcostofmeetingthisSFobligationifyoudecidetohedgeusingaforwardcontract.

（c）Atwhatfuturespotexchangeratewillyoubeindifferentbetweentheforwardandoptionmarkethedges?

（d）IllustratethefuturedollarcostsofmeetingtheSFpayableagainstthefuturespotexchangerateunderboththeoptionsandforwardmarkethedges.

Solution:

（a）Totaloptionpremium=（.05）（5000）=$250.Inthreemonths,$250isworth$=$250.Attheexpectedfuturespotrateof$SF,whichislessthantheexerciseprice,youdon’texpecttoexerciseoptions.Rather,youexpecttobuySwissfrancat$SF.SinceyouaregoingtobuySF5,000,youexpecttospend$3,150（=.63x5,000）.Thus,thetotalexpectedcostofbuyingSF5,000willbethesumof$3,150and$,.,$3,.

（b）$3,150=（.63）（5,000）.

（c）$3,150=5,000x+,wherexrepresentsthebreak-evenfuturespotrate.Solvingforx,weobtainx=$SF.Notethatatthebreak-evenfuturespotrate,optionswillnotbeexercised.

（d）IftheSwissfrancappreciatesbeyond$SF,whichistheexercisepriceofcalloption,youwillexercisetheoptionandbuySF5,000for$3,200.ThetotalcostofbuyingSF5,000willbe$3,=$3,200+$.

Thisisthemaximumyouwillpay.

4.BoeingjustsignedacontracttosellaBoeing737aircrafttoAirFrance.AirFrancewillbebilled€20millionwhichispayableinoneyear.Thecurrentspotexchangerateis$€andtheone-yearforwardrateis$€.Theannualinterestrateis%intheU.S.and%inFrance.Boeingisconcernedwiththevolatileexchangeratebetweenthedollarandtheeuroandwouldliketohedgeexchangeexposure.

（a）Itisconsideringtwohedgingalternatives:

selltheeuroproceedsfromthesaleforwardorborroweurosfromtheCreditLyonnaiseagainsttheeuroreceivable.Whichalternativewouldyourecommend?

Why?

（b）Otherthingsbeingequal,atwhatforwardexchangeratewouldBoeingbeindifferentbetweenthetwohedgingmethods?

Solution:

（a）Inthecaseofforwardhedge,thefuturedollarproceedswillbe（20,000,000）=$22,000,000.Inthecaseofmoneymarkethedge（MMH）,thefirmhastofirstborrowthePVofitseuroreceivable,.,20,000