FINC495 Week 4 Assignment

Exercises and Problems from Chapters 9 & 10:

Chapter 9, Pg 242 Questions 1, 5, & 8 – 9

Chapter 9, Pg 242 Problem 2

Chapter 10, Pg 259 Questions 1,2, & 5

 

Chapter 9

Question 1

How would you define economic exposure to exchange risk?

 

Question 5

Discuss the determinants of operating exposure.

 

Question 8

What are the advantages and disadvantages to a firm of financial hedging of its

operating exposure compared to operational hedges (such as relocating its manufacturing

site)?

 

Question 9

Discuss the advantages and disadvantages of maintaining multiple manufacturing

sites as a hedge against exchange rate exposure.

 

Problem 2

A U.S. firm holds an asset in France and faces the following scenario:

	State 1	State 2	State 3	State 4
Probability	25%	25%	25%	25%
Spot rate	$1.20/€	$1.10/€	$1.00/€	$0.90/€
P*	€1500	€1400	€1300	€1200
P	$1,800	$1,540	$1,300	$1,080

 

In the above table, P^* is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset.

(a) Compute the exchange exposure faced by the U.S. firm.

(b) What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?

(c)   If the U.S. firm hedges against this exposure using the forward contract, what is the variance of  the dollar value of the hedged position?

 

Chapter 10

Question 1

Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.

 

Question 2

How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/noncurrent method, the monetary/nonmonetary method, and the temporal method?

 

Question 5

It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the other. Discuss which exposure might be viewed as the most important to effectively manage, if a conflict between controlling both arises. Also, discuss and critique the common methods for controlling translation exposure.