2024 – Question 1 Oregon Transportation Inc OTI has just signed a contract to purchase light rail cars

Question

1. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:

The spot exchange rate is $.8924/€

The six month forward rate is $.8750/€

OTI’s cost of capital is 11%

The Euro zone 6-month money market rates are 7%-9% pa

The U.S. 6-month money market rates are 6%- 8% pa

The premium (option price) for December call options with strike price $.90 is 1.5%

OTI’s forecast for 6-month spot rates is $.91/€

The budget rate, or the highest acceptable purchase price for this project, is $2,300,000 or $.92/€

 

Assume that analysts consider the following likely exchange rate scenarios each with an equal probability of occurance (i.e. 33.3%)

Strong Dollar: $0.8600

Neutral :$0.8750

Weak Dollar :$0.9500

Assume that Oregon selected to use forward hedge. What will be the expected cost of the rail cars? (Hint: Use statistical expectation to calculate the expected cost)

A. $2,150,000

B. 2,160,527

C. 2,241,778

D. $2,187,500

E. $2,350,000

 

2. Firm “J” is a U.S.-based MNC with net cash inflows of German marks and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Firm “K” is a U.S.-based MNC that has the same exposure as Firm “J” in these currencies, except that its Sunland francs represent cash outflows. Which firm has a higher exposure to exchange rate risk? a. Firm “J”. b. Firm “K”. c. Firms “J” and “K” have about the same level of exposure. d. Neither firm has any exposure.

A. Firm “J”.

B. Firm “K”.

C. J and K have same level of exposure

D. Neither firm has any exposure

 

3. Annual inflation rates in the US and Turkey were 2% and 20% and 3% and 10% in 2003 and 2004 respectively. The spot rate for the New Turkish Lira (TRY) was is 1.55 per dollar in January 2003.

Calculate the expected PPP implied USD/TRY exchange rate as of end of 2004.

A. USD/TRY1.8555

B. USD/TRY1.9475

C. USD/TRY1.7878

D. USD/TRY 2.1010

E. USD/TRY2.30

 

4. The following spot and interest rates to answer the following question:

USD/EURO 1.2310-1.2340

R-USD-3-months: 3.00%-3.25% pa

R-EUR-3-months: 4.00%-4.50% pa

Assume that you are a banker and you bought Eur100m forward based on the forward price calculated from rates available above. However, after you entered into the contract , you did not engage in the series of transactions that you supposed to (in order to create a risk free position). In other words, you have a net exposure of EUR100m. Suddenly three months later Fed dramatically increased interest rates, which pushed the reference rates up by 2% in US. In response to interest rate hike, USD/EUR rate also moved down to: USD/EUR1.2050-1.2090. Concerned about further movements in the interest and exchange rates, you completed the loop by borrowing in Euros, converting them into USD and depositing dollars into an interest earning account (all with 9 months maturity). What would be your net loss or gain With these sharp movements in interest rates, how much money would your bank lose or gain because of the forward contract you quoted based on the given rate?

A. Gain 2,700,000

B. Loss, 2,700,000

C. Gain 3,452,366

D. Loss, 3,451,366

E. None of the above

 

5. P&G is a US based MNC and has operations in Germany. P&G expects 120,000,000 DEM cash flows in 6 months, however due to significant volatility, cash flows are expected to fluctuate as much as 20%. In other words P&G can get DEM120m, DEM96m or DM144m depending on the economic conditions. Based on their expectations, P&G treasurers choose to sell DEM96m forward at DEM1.90and buy DEM48m put option at DEM1.90 both with six month maturities. The cost of the put option is $0.02. Assume that the spot exchange rate turns out to be DEM2.10/USD at the expiration and cash flows materialize as DEM144,000,000. What will the net USD cash-flows of P&G and what will be the cost of acquiring one US dollar?

A. 50,526,316 and DEM1.9000/USD

B. 25,263,158 and EM1.9200/USD

C. 74,829,474 and 1.924

D. none of the above

 

6. Sony of Japan produces DVD players and exports them to the United States. Last year the exchange rate was 135/$ and Sony charged $145 per DVD player. Currently the spot exchange rate is 105/$ and Sony is charging $175 per DVD player. What is the degree of pass through by Sony of Japan on their DVD players?

A. 86.7%

B. 72.4%

C. 73.2%

D. 27.58%

 

7. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:

The spot exchange rate is $.8924/€

The six month forward rate is $.8750/€

OTI’s cost of capital is 11%

The Euro zone 6-month money market rates are 7%-9% pa

The U.S. 6-month money market rates are 6%- 8% pa

The premium (option price) for December call options with strike price $.90 is 1.5%

OTI’s forecast for 6-month spot rates is $.91/€

The budget rate, or the highest acceptable purchase price for this project, is $2,300,000 or $.92/€

 

Assume that analysts consider the following likely exchange rate scenarios each with an equal probability of occurance (i.e. 33.3%)

Strong Dollar: $0.8600

Neutral :$0.8750

Weak Dollar :$0.9500

Assume that Oregon selected to use December call option.What will be the expected cost of the rail cars? (Hint: Use statistical expectation to calculate the expected cost)

A. $2,156,760

B. $2,182,450

C. $2,160,527

D. $2,241,778

E. $2,187,500

 

8. A US company expects SFR120m cash flow 12 months from now. However the exact amount may vary +/-20%. Company develops an analysis to decide on the best hedging strategy. They forecast that spot exchange rate can be either SFR1.2030 , 1.375 or 1.5470. They consider selling SFR 96m forward @1.375 and buying SFR48m put option @ strike price SFR1.375/$. They pay $0.0345 per SFR. Assume that actual cash flows turned out to be SFR120m. Calculate the net USD receipts if spot rate is SFR 1.5470/USD

A. 87,557,374

B. 89,213,374

C. 69,818,193

D. None of the above

 

9. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

? The spot exchange rate is $1.1740/

? The six month forward rate is $1.1480/

? Plains States’ cost of capital is 12% per annum

? The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)

? The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)

? The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)

? The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)

? December put options for 625,000; strike price $1.18, premium price is 1.5%

? Plains States’ forecast for 6-month spot rates is $1.19/

? The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/

 

If Plains States locks in the forward hedge at $1.1480/, and the spot rate when the transaction was recorded on the books was $1.174/, this will result in a “foreign exchange loss” accounting transaction of ________.

A. There is not enough information to answer this question.

B. $0

C. $32,500

D. This was not a loss; it was a gain of $32,500.

 

10. ABC International treasurers entered into a range forward contract (also called zero cost cylinder). The contract requires Purchase of a euro put option for Eur100m at a strike price USD/EUR1.2800 and sale of Eur100m call option at a strike price of USD/EUR 1.3500. The premium paid for the put option is $0.01. What would be the net USD receipts of the ABC if the spot rate is USD/EUR1.2930?

A. 128,000,000

B. 135,000,000

C. 129,300,000

D. 128,300,000

E. There is not sufficient information to calculate the effective receipt.

 

11. Assume that Fisher Effect holds. Based on the following market information for Argentina and US, calculate the One-Year “t-bill” rate for US (Do not use the approximation).

Argentina:

Spot Rate:ARP 3.4375/USD Expected inflation rate: 8.00% p.a. 1-Year Treasury Bill Yield: 11.00% pa

United States:

Spot Rate: USD 0.2909/ARP Expected Inflation: 2.00% p.a.

1 Year Treasury Bill Yield: ?

A. 5.83%

B. 2.77%

C. 3.77%

D. 4.83%

 

12. Last week ABCLandLira-US dollar exchange rate moved from ABCL687,000/USD to ABCL1,072,000/USD. Calculate the depreciation of ABCLand lira visa vie US dollar. a-56.00% b- 65.00% c-35.91% d-none of the above

A. 35.91%

B. 56%

C. 35.91%

D. none of the above

 

13. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:

The spot exchange rate is $.8924/€

The six month forward rate is $.8750/€

OTI’s cost of capital is 11%

The Euro zone 6-month money market rates are 7%-9% pa

The U.S. 6-month money market rates are 6%- 8% pa

The premium (option price) for December call options with strike price $.90 is 1.5%

OTI’s forecast for 6-month spot rates is $.91/€

The budget rate, or the highest acceptable purchase price for this project, is $2,300,000 or $.92/€

 

Assume that analysts consider the following likely exchange rate scenarios each with an equal probability of occurance (i.e. 33.3%)

Strong Dollar: $0.8600

Neutral :$0.8750

Weak Dollar :$0.9500

Assume that Oregon selected to use money market hedge.What will be the expected cost of the rail cars? (Hint: Use statistical expectation to calculate the expected cost)

A. 2,150,000

B. 2,187,500

C. 2,231,500

D. 2,241,778

 

14. Copy of 7- A US based speculator wanted to take advantage of high domestic interest rates in ABC-Land. One month ABC-Land treasuries offered 40% pa interest while speculator’s US dollar cost was only 20%pa. Speculator bought $10,000,000 equivalent of one-month maturity ABC-Land treasuries when the exchange rate was at ABCL687. Speculator expected a slight depreciation to ABCL690 since ABC-Land was under a crawling peg exchange rate regime. However, a political crisis led ABC-Land to abandon the crawling peg and currency was floated. At the maturity of treasury (in one month) ABCLand Lira was trading at ABCL1,200/USD. Calculate the loss of the speculator?

A. -$5,915,833

B. -$10,166,667

C. -$4,250,833

D. none

 

15. Oregon Transportation Inc. (OTI) has just signed a contract to sell light rail cars to a manufacturer in Germany for 2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

? The spot exchange rate is $1.1740/ €

? The six month forward rate is $1.1480/€

? OTI’s cost of capital is 12% per annum

? The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)

? The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)

? The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)

? The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)

? December put options for 625,000; strike price $1.18, premium price is 1.5%

? OTI’s forecast for 6-month spot rates is $1.19/€

? The budget rate, or the highest acceptable purchase price for this project, is $2,975,000 or $1.19/ €

 

If OTI chooses to hedge its transaction exposure in the forward market, the company will ________ 2,500,000 forward at a rate of ________.

A. buy, $1.174

B. sell, $1.148

C. buy, $1.148

D. sell, € 1.174

 

16. TropiKana Inc. has just borrowed€ 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.00% per year and the Euro depreciates against the dollar from $1.15/€ at the time the loan was made to $1.12/€at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)?

A. $937,500

B. $1,176,000

C. €937,500

D. $1,050,000

 

17. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for € 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

? The spot exchange rate is $1.1740/ €

? The six month forward rate is $1.19/ €

? Plains States’ cost of capital is 12% per annum

? The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)

? The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)

? The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)

? The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)

? December put options for € 625,000; strike price $1.18, premium price is 1.5%

? Plains States’ forecast for 6-month spot rates is $1.1480/€

? The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/€

 

Plains States would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

A. better off; $52,500

B. worse off; $10,000

C. better off; $10,000

D. worse off; $52,500

 

18. Annual inflation rates in the US and Turkey were 2% and 20% and 3% and 10% in 2003 and 2004 respectively. The spot rate for the New Turkish Lira (TRY) was is 1.55 per US Dollar in January 2003.

The actual spot rate observed on January 1st 2005 was USD/TRY1.35. Based on the PPP expectations which one of the following is a correct statement?

A. Turkish Lira is undervalued

B. USD is overvalued

C. Turkish Lira is supervalued

D. Turkish Lira is overvalued

E. None of the above

 

19. Suppose that on January 1st the annual cost of borrowing in Swiss Francs is 5%. The spot rate of USD on January 1st is CHF/USD0.98. Six month forward rate was quoted as CHF/USD 0.95. What is the Swiss Franc cost of borrowing in USD?

A. 8.32%

B. 5%

C. 4.5%

D. 3.72%

E. None of the above

 

20. Suppose annual inflation rates in the US and Mexico are expected to be 3% and 10% respectively, over the next two years. If the current spot rate for the Peso/USD is P12/USD, then relative purchasing power parity suggests that the exchange rate in three years will be approximately _________.

A. P14.62

B. 12.82

C. P13.69

D. None of the above

 

21. Use the following data to calculate the Net Change in Reserves for Dotcomland :

Private Savings 300bn

Private Investments 310bn

Government Revenues 400bn

Government Expenditures 430bn

Net Statistical Discrepancy -10bn

Capital Account +70bn

A. 120bn

B. 60bn

C. 70bn

D. 20

E. none of the above

 

22?Suppose you work for XYZLand-Citicorp in XYZLand. A local bank wanted to buy USD50,000,000 three month forward. Since you think XYZLand is a very risky environment you need to built 10% margin (annual) in your forward price to account for risk. Current spot and interest rates in USD and XYZLand Lira are as follows. What would be your forward quote?

XYZ currency/USD 685-700

RUSD: 7.50-8.50 p.a.

RXYZL:35.00-45.00% p.a.

A. 783.5

B. 764.4

C. 840.4

D. none of the above

 

23. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for 2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

? The spot exchange rate is $1.1740/€

? The six month forward rate is $1.1400/€

? OTI’s cost of capital is 12% per annum

? The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)

? The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)

? The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)

? The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)

? December put options for 625,000; strike price $1.18, premium price is 1.5%

? OTI’s forecast for 6-month spot rates is $1.19/€

? The budget rate, or the highest acceptable purchase price for this project, is $2,975,000 or $1.19/€

 

If OTI locks in the forward hedge at $1.140/€, and the spot rate when the transaction was recorded on the books was $1.178/€ , this will result in a “foreign exchange ________” accounting transaction of ________.

A. loss, $95,000

B. gain, €95,000

C. gain, $95,000

D. loss, €95,000