Financial Assignment

For each of your answers, be as specific as possible about all transactions and amounts involved.

 

All interest rates are stated as annual rates.

 

Part 1 Transaction risk

1 (10 points)

a. Select a foreign currency

b. Find the spot exchange rate for that currency

c. Select an amount between 150 million and 200 million

d. Select a number of months between 3 and 9

e. Select either payable or receivable. If you select payable, for the rest of the questions in this part of the assignment, assume a US firm is required to make a payment of the number selected in part c of the foreign currency from part a at the time selected in part d.  If you select receivable, assume a US firm expects to receive a payment of the number of units selected in part c of the foreign currency from part a at the time selected in part d.

e. Describe the future payment (in $) from the above assumptions if the exchange rate remains the same as it is today.

 

2. (10 points) Explain how the firm can use leading or lagging to reduce the exchange rate risk created by this payment.

 

3. (20 points) Assume the US interest rate is 2% and the foreign interest rate is 5%, how can the firm hedge the transaction risk associated with the payment using a money market hedge?

 

4 (20 points)

a. How can the firm hedge the transaction risk associated with the payment using a forward market hedge?

b. If the forward price is 1% lower than the spot exchange rate (from 1b) and the actual exchange rate on the date the payment is due is 1% higher than the spot exchange rate, what will the dollar value of the amount the firm pays or receives on the due date be?

c. If the forward price is 2% higher than the spot exchange rate (from 1b) and the actual exchange rate on the date the payment is due is 1% higher than the spot exchange rate, what will the dollar value of the amount the firm pays or receives on the due date be?

 

5 (20 points)

a. How can the firm hedge the risk associated with the payment using a foreign currency option?

b. If the option’s strike price is equal to the spot exchange rate (from 1b) and the actual exchange rate on the payment is due is 2% lower than the spot market price, will the firm exercise the options and what will the dollar amount the firm pays or receives on the due date be?

c. If the option’s strike price is equal to the spot exchange rate (from 1b) and the actual exchange rate on the payment is due is 2% higher than the spot market price, will the firm exercise the options and what will the dollar amount the firm pays or receives on the due date be?

 

6. (10 points) How could the firm hedge the transaction risk associated with this payment by exposure netting or funds adjustment?

 

Part 2 Economic risk

1. (10 points) Obtain weekly stock prices for the last five years for a US company and a foreign company of your choice.

 

2. (10 points) Obtain exchange rates for three different foreign currencies, one of which must be the British pound or the Euro, and the other the Japanese yen, the Mexican peso, the Canadian dollar, and the third the currency of the country where the foreign firm is located for the same dates as the stock prices in question 1. (If the foreign firm is located in the UK or the euro area, use the other of the two as your first currency. If it is located in Japan, Mexico or Canada, use one of the other two currencies as your second currency.)

 

3. (10 points) Calculate weekly returns on each stock and weekly percentage changes in the exchange rate for each currency.

 

4. (60 points) Determine the economic risk of the US stock and the foreign stock with respect to each of the foreign currencies. (You will have a separate regression for company and currency; a total of six regressions.)

 

For each company and currency:

(a) Describe the magnitude of the stock’s risk relative to the currency (e.g., “a 1% increase in the value of the currency is associated with a ___% change in the value of the stock”).

 

(b) Indicate whether the stock price increases or decreases as the value of the foreign currency increases.

 

(c) Determine whether the company’s risk relative to that currency is statistically significant.

 

(d) Indicate what portion of the stock return volatility canbe eliminated if the currency risk were hedged perfectly.

 

 

 

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HOW TO PREPARE AND PRESENT A CASE Ar

in preparing a Comprehensive Written Analysis ·ng a written case analysis, you could follow the steps outlined here, which correlate to

prepa~ in the strategic-management process and the chapters in this text. (Note-The steps stage an oral case analysis are given on pages 367-369, are more detailed, and could be

here). SteP 1 Identify the firm’s existing vision, mission, objectives, and strategies.

SteP 2 Develop vision and mission statements for the organization.

SteP 3 Identify the organization’s external opportunities and threats.

SteP 4 Construct a Competitive Profile Matrix (CPM). Step 5 Construct an External Factor Evaluation (EFE) Matrix.

Step 6 Identify the organization’s internal strengths and weaknesses.

Step 7 Construct an Internal Factor Evaluation (IFE) Matrix.

Step 8 Prepare a Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, Strategic Position and Action Evaluation (SPACE) Matrix, Boston Consulting Group (BCG) Matrix, Internal-External (IE) Matrix, Grand Strategy Matrix, and Quantitative Strategic Planning Matrix (QSPM) as appropriate. Give advantages and disadvantages of alternative strategies.

Step 9 Recommend specific strategies and long-term objectives. Show how much your recommendations will cost. Clearly itemize these costs for each projected year. Compare your recommendations to actual strategies planned by the company.

Step 10 Specify how your recommendations can be implemented and what results you can expect. Prepare forecasted ratios and projected financial statements. Present a timetable or agenda for action.

Step 11 Recommend specific annual objectives and policies .

Step 12 Recommend procedures for strategy review and evaluation.

Making an Oral Presentation Your professor may ask you to prepare a strategic-management case analysis, individually or as a group, and present your analysis to the class. Oral presentations are usually graded on two parts: content and delivery. Content refers to the quality, quantity, correctness, and appropriate- ness of analyses presented, including such dimensions as logical flow through the presentation, coverage of major issues, use of specifics, avoidance of generalities, absence of mistakes, and feasibility of recommendations. Delivery includes such dimensions as audience attentive- ness, clarity of visual aids, appropriate dress, persuasiveness of arguments, tone of voice, eye contact, and posture. Great ideas are of no value unless others can be convinced of their merit through clear communication. The guidelines presented here can help you make an effective oral presentation.

Otganizing the Presentation Begin your presentation by introducing yourself and giving a clear outline of topics to be covered. If a team is presenting, specify the sequence of speakers and the areas each person Will address. At the beginning of an oral presentation, try to capture your audience’s interest ~nd attention. You could do this by displaying some products made by the company, telling an Interesting short story about the company, or sharing an experience you had that is related to the company, its products, or its services. You could develop or obtain a video to show at the ?eginning of class; you could visit a local distributor of the firm’s products and tape a personal Interview with the business owner or manager. A light or humorous introduction can be effective__… at the beginning of a presentation.

Be sure the setting of your presentation is well organized, with seats for attendees, flip Charts, a transparency projector, and whatever else you plan to use. Arrive at the classroom at least 15 minutes early to organize the setting, and be sure your materials are ready to go. Make sure everyone can see your visual aids well.