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(a)

(6) How much would Bonjur have to pay in dollars for the purchase if it paid on July l?

(c) If Bonjur paid for the purchase using the July 1spot rate, what would be the exchange gain

or loss?

SOLUTION

(a) 400,000francs X $0.20 per franc = $ 80,000

( 6 ) 400,000 francs X $0.25 per franc = $100,000

CHAP. 1 1

9 463

MULTINATIONAL FINANCE

Liability in dollars, April 1 $ 80,000

(c)

100,000

Paid in dollars, July 1

$ 20,000

Exchange loss

Spot Rates. On August 1, Kidd Trading received an order from a British customer for

19.4

&1,000,000to be paid on receipt of the goods, scheduled for November 1.

The rates for $1 US are as follows:

Exchange Rates for $1 for British E

1.617

Spot rate, June 1

1.615

Forward rate, August 1

1.616

Spot rate, August 1

( a ) How much does Kidd expect to receive from the British customer in dollars using the spot

rate at the time of the order?

( b ) How much does Kidd expect to receive from the British customer in dollars using the spot

rate at the time of payment?

SOLUTION

$618,429.19(f1,000,000/1.617)

(a)

( b ) $618,811.81(f1,OOO,OOo/1.616)

Exchange Gain or Loss and Hedging. Using the same data in Problem 19.4:

19.5

Calculate Kiddâ€™s exchange gain or loss if Kidd receives payment from the British

(a)

customer using the spot rate at the time of payment.

( b ) Calculate the amount Kidd expects to receive on November 1in dollars, if Kiddâ€™s policy

is to hedge foreign currency transactions.

SOLUTION

$618,811.81

Receivables in dollars, August 1

618,429.19

Received in dollars, November 1

382.62

Exchange gain $

$619,195.05(f1,OOO,OOO/l .615)

Arbitrage and Exchange Gain or Loss. You own $10,000. The dollar rate on the DM is 1.380

19.6

marks.

US Dollar Currency

Equivalent per US$

Country Contract (Direct) (Indirect)

I

0.7282 1.3733

Germany Spot

0.7290 1.3716

(Mark) 30-day future

0.7311 1.3677

90-day future

Based on the table above, are arbitrage profits possible? What is the gain (loss) in dollars?

464 MULTINATIONAL FINANCE [CHAP. 19

SOLUTION

The dollar rate on the DM is 1.380 marks, while the table (indirect New York rate) shows 1.3773

(U0.7282) marks. Note that the rates between Germany and New York are out of line. Thus, arbitrage profits

are possible. Since the DM is cheaper in Germany, buy $lO,OOO worth of marks in Germany. The number

of marks purchased would be 13,800 ($lO,OOO X 1.380) marks. Simultaneously sell the marks in New York

at the prevailing rate. The amount received upon sale of the marks would be $10,049.16 (13,800 marks X

$0.7282/DM) = $10,049.16. The net gain is $49.16, barring transactions costs.

Interest-RateParity. If the interest rates on the 30-day instruments in the US and Germany are

19.7

12 and 10percent (annualized), respectively, what is the correct price of the 30-day forward DM?

(Use the table in Problem 19.6.)

SOLUTION

First, compute the premium (discount) on the forward rate using:

rf - r d

P (or D)= -

1+ rf

Thus,

0.10 - 0.12

= 0.0182

1+ 0.10

Compute the forward rate using the equation:

F-S 12 months

P (or D)= -X x 100

S n

F - 0.7282 12

- x 100

0.0182 =

0.7282 1

Solving this equation for F yields: 0.7293

Interest-RateP r t .Almond Shoe, Inc. sells to a wholesaler in Germany. The purchase price of

aiy

19.8

a shipment is 50,000 DM with terms of 90days. Upon payment, Almond will convert the DM to

dollars.

I I

US Dollar Currency

Country Contract Equivalent per US$

Spot 0.730 1.37

Germany

(Mark) 90-day future 0.735 1.36

If Almondâ€™s policy is to hedge its foreign exchange risk, what would it do?

Is the DM at a premium or at a discount?

What is the implied differential in interest rates between the two nations, using the

interest-rate parity theory?

SOLUTION

90 days, it

( a ) Almond would hedge by selling DMs forward 90 days. Upon delivery of 50,000 marks in

would receive $36,764.71 (50,000 DMsI1.36). It were to receive payment today. It would get only

$36,496.35 (50,000 DMd1.37).

(6) The DM is at a premium because the 90-day forward rate of DM per dollar is less than the current

spot rate. The DM is expected to strengthen (fewer DM to buy a dollar).

465

CHAP. 191 MULTINATIONAL FINANCE

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