Mini Case For your job as the business reporter for a ...



Mini Case For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor: To: Business Reporter From: Perry White, Editor, Daily Planet Re: Upcoming Series on Multinational Finance In your upcoming series on multinational finance, I would like to make sure you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the same script because accuracy has always been the cornerstone of the Daily Planet. I’d like a response to the following questions before we proceed: a. What new problems and factors are encountered in international, as opposed to domestic, financial management? b. What does the term arbitrage profits mean? c. What can a firm do to reduce exchange risk? d. What are the differences among a forward contract, a futures contract, and options? Use the following data in your responses to the remaining questions: Selling Quotes for Foreign Currencies in New York COUNTRY-CURRENCY CONTRACT $/FOREIGN Canada–dollar Spot .8450 30-day .8415 90-day .8390 Japan–yen Spot .004700 30-day .004750 90-day .004820 Switzerland–franc Spot .5150 30-day .5182 90-day .5328 e. An American business needs to pay (a) 15,000 Canadian dollars, (b) 1.5 million yen, and (c) 55,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries? f. An American business pays $20,000, $5,000, and $15,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the sup

a. The additional factors that must be considered in international finance relate to: multiple currencies, different legal requirements, institutional restrictions, and internal control problems. These issues are discussed in the introduction to the chapter.

b. Arbitrage profits are the riskless profits made without investing funds. These profits are generated when certain assets are not priced according to an equilibrium relationship. For example, arbitrage profits are possible in the spot and forward exchange markets if the indirect quote or cross quote relationships are out of line. The respective arbitrage processes are called simple and triangular arbitrage. Arbitrage opportunities exist if the money market rates differ from the forward market rates. This is referred to as: Covered Interest Arbitrage.

c. Short-term exchange risk can be covered by the money market or the forward market hedge. The hedge should be so constructed that the net asset (liability) position in a foreign currency is zero. In addition to the amount of hedge, the maturity of the hedge should also be matched. This ensures that the risk of foreign exchange exposure is eliminated.

d. A forward exchange contract requires delivery, at a specified future date, of one currency for a specified amount of another currency. The exchange rate for the future transaction is agreed upon today. The physical transaction takes place at the future date.

Futures contracts (like forward exchange contracts) provide fixed prices for the required delivery of a foreign currency at maturity.

Options, on the other hand, permit fixed (strike) price foreign currency transactions anytime prior to maturity.

Futures contracts and options are traded in standardized amounts with standardized maturity dates. These instruments are traded on organized security exchanges. The individual traders deal with the exchange-based clearing organization rather than the direct parties to the foreign currency transaction.

Forward contracts are quite different. Typically, they are written by banks and the firm deals directly with the banking institution rather than the organized security exchange.

e. (1) 15,000 (Canadian $) x . 8450 (U.S. $/Canadian $) = $12,675

(2) 1,500,000 (Yen) x .004700 ($/Yen) = $ 7,050

(3) 55,000 (Swiss-franc) x .5150 ($/Swiss franc) = $28,325.

f. (1) 20,000 ($) x 1/.004700 (Yen/$) = 4,255,319.15 Yen

(2) 5,000 ($) x 1/.5150 (Swiss franc/$) = 9,708.74 Swiss franc

(3) 15,000 ($) x 1/.8450 (Canadian $/U.S. $) = 17,751.48 Canadian $.

g. Recall that the indirect quote = (1/Direct Quote). The results are tabulated below:

Foreign Currency / $

Canadian - dollar

Spot 1.1834

30 day 1.1884

90 day 1.1919

h. The Tokyo rate is 216.6752 Yen/$.

The (indirect) New York rate is 1/.004700 = 212.7660 Yen/$.

Assuming no transaction costs, the rate between Tokyo and New York are out of line.

Arbitrage profits are possible.

Yen is cheaper in Tokyo. Buy Yen for $10,000.

$10,000 x 216.6752 = 2,166,752 Y.

Sell the Yen in New York at the prevailing rate.

2,166,752 x .004700 = $10,183.73

Your net gain is $10,183.73 - $10,000 = $183.73

i. (Canadian dollar/Yen) = ($/Yen) ( [pic]

= .004700 ( (1/.8450)

= .00556

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download