Here is a lot of information but I really needed step by step help on how to solve these questions.
1\. Hood College has recently been accepting many foreign students from Saudi Arabia. These students have been coming under a Saudi government program and Hood recently signed a three year agreement with the Saudi government to accept these students. Saudi government is happy to pay these students’ tuition in USD but has indicated that they will be just as happy to pay in JPY. Hood College Admissions office thinks that this may be a good idea because if Hood accepts tuition payments in JPY, Saudi government may send as many as 20 more students per year. Hood College’s CFO thinks this is a bad idea for obvious reasons. But overlunch, he heard you casually mention currency swaps and he is now very much intrigued.
1. Explain how a currency swap would work in this case. What benefit would Hood College gain from entering into a swap? Currently, annual interest payment on Hood’s loan from BB&T is USD 2 million, about the same as the tuition revenues from the Saudi students. CFO would rather this arrangement be a short one, three years or so. Current spot exchange rate is JPY 100/USD and swap rates are given in Table A below. Be as specific as you can.
2. Even though we all know that governments never lie, CFO would like to be prepared in case the Saudi government changes its mind, either about paying in JPY or sending their students to Hood College. He wants you to carefully explain how a currency swap may be unwound. He wants you to be as specific as you can about what Hood will have to pay to get out of the currency swap you designed in part a after one year into the swap if the JPY and USD interest rates are 0.37 and 5.16, respectively. Assume that the actual spot exchange rate at the time of unwinding is JPY 110/USD.
EC/MG 478 Spring 2019 International Financial Management Sample Final Exam
1. Boise Cascade, a U.S. wood products company, has just signed a 10 year contract to buy unprocessed lumber from a Canadian firm, all payments to be made in CAD. Lumber prices may be reset by the Canadian firm every six months and Boise Cascade has to place their order six months in advance. All orders are payable within 180 days upon receipt of invoice. What kind of foreign exchange exposure does this cause for Boise Cascade? Carefully explain. Carefully describe three different ways Boise Cascade can hedge this exposure, other than entering into a currency swap.
2. AJ Industries (AJI), a Frederick, MD based firm, has just signed a contract to purchase a piece of very sophisticated chip making equipment from Li Van Weaver, Ltd. (LVW), an Austrian firm based in Salzburg, for €1,250,000. The sale was made in May 2019 with payment due six months later. Because this is a sizable contract for AJI and because the contract is in EUR rather than USD, CFO of AJI is considering several hedging alternatives to reduce the exchange rate risk arising from the purchase and hired you as a consultant. To help the CFO make a hedging decision you have gathered the following information.
3. The spot exchange rate is $0.8924/€
4. The six month forward rate is $0.8750/€
5. AJI’s cost of capital is 10%
6. The Euro zone 6-month borrowing rate is 6%
7. The Euro zone 6-month lending rate is 4%
8. The U.S. 6-month borrowing rate is 3%
9. The U.S. 6-month lending rate is 1%
10. November 2013 put options for €625,000: strike price $0.9000, premium is 1.5% November 2013 call options for €625,000: strike price $0.9000, premium is 1.0%
11. What type of exposure is AJI facing? How much?
12. If AJI carries out a forward hedge, how much dollars will they need to fulfill this contract in November 2016?
13. Explain how AJI might carry out a money market hedge. (Hint: Just explain each step of the money market hedge – no need to do a calculations.)
14. What is the dollar value of this contract if AJI chooses a money market hedge?
15. CFO would like to consider a hedging strategy using F/X options. Evaluate the outcome of an options hedge. Draw the payoff function for this option hedge.
16. CFO is brash young heir apparent (and a nephew) to the CEO. Since he became the CFO six months earlier, he has been taking on many risky business propositions that has so far paid off. Make a hedging strategy recommendation to the CFO. Always keep in mind that no hedging is a valid strategy. Briefly justify your recommendation.