1. Please define the following four exposures.
(a) Transaction exposure –
(b) Operating exposure –
(c) Translation exposure –
(d) Tax exposure –
2. Your company will receive 5 million yen in six months for selling heavy equipment. You are concerned about this transaction exposure and investigate four methods to protect your company. You have the following data:
(i) Spot rate is $1 / 75 yen
(ii) The six-month forward rate is $1 / 73 yen
(iii) The six-month loan rate in Japan is 8% APR.
(iv) You could buy six-month put option for yen. The strike price is $1 / 72 yen, and the premium is 1%
(a) Calculate the accounts receivable if the company just uses the spot rate.
(b) Calculate the accounts receivable if the company uses the forward contract.
(c) Calculate the accounts receivable, if your company borrows against the accounts receivable in Japan.
(d) Calculate the accounts receivable if you buy put options.
3. Your company will purchase tomatoes from Mexico for 500,000 pesos in 30 days. You are concerned about this transaction exposure and investigate four methods to protect your company. You have the following data:
(i) The spot rate is $1 / 11 pesos.
(ii) The thirty-day forward rate is $1 / 12 pesos.
(iii) The thirty-day savings rate in Mexico is 11% APR.
(iv) You could buy thirty-day call option for pesos. The strike price is $1 / 13 pesos, and the premium is 1.5%
(a) What is the value of the accounts payable if the company just uses the spot rate.
(b) Identify the value of the accounts payable if the company uses the forward contract.
(c) Evaluate the value of the accounts payable if you invest in Mexico.
(d) What is the value of the accounts payable if you buy put options.
4. Your company will receive 2 million Canadian dollars (CD) in two months for selling a shipment of cars. You are concerned about this transaction exposure and investigate four methods to protect your company. You have the following data:
(i) The spot rate is $1 / 1 CD.
(ii) The two-month forward rate is $1 / 0.9 CD
(iii) The two-month loan rate in Canada is 4% APR.
(iv) The company is willing to pay immediately if your company grants a 3% discount rate.
(a) Identify the value of the accounts receivable if the company just uses the spot rate.
(b) Evaluate the value of the accounts receivable if the company uses the forward contract.
(c) Identify the value of the accounts receivable is if your company borrows against the accounts receivable in Canada.
(d) Evaluate the value of the accounts receivable if your company grants the 3% discount.
5. Please define the following types of risk.
(a) Political Risk -
(b) Firm Specific Risk -
(c) Country Risk -
(d) Global Specific Risk -
6. What are three types of Global Specific Risk?
7. Distinguish between country risk and global risk.
(a) Evaluate the function of fronting loans.
(b) How could a firm use export creation to reduce country risk?
(c) Explain special dispensation.
(d) Identify the role of forced re-investment.
8. What is cultural and institutional risk?
(a) How does cultural and institutional risk play a role in ownership?
(b) How does cultural and institutional risk play a role in labor?
(c) How does cultural and institutional risk play a role in corruption?
(d) How does cultural and institutional risk play a role for religion?
9. What is Firm Specific Risk?
(a) What are sources of conflict between a firm and government?
(b) What can an international firm insure for a business located in a foreign country?
10. For Firm Specific Risk, a firm tries to protect its business in a foreign country. For each of the following, explain how a firm can protect its business.
(a) Facility location -
(b) Intellectual Property Rights -
(c) Leverage -
11. Which three industries does a government protect?
(a) Which two methods a government uses to protect its industries?
12. What are two risks associated with bonds?
(a) What is a risk premium?
(b) Which bonds are considered low risk and establish the riskless interest rate?
13. What are the two approaches to measure a country's risk?
14. What is the Risk Rating System?
(a) Which four factors are included in this system?
(b) Is this Risk Rating System objective or subjective? Please explain.
15. Distinguish between the international credit-rating agencies: A.M. Best and Coface.
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