Chap 5 – Problems:2,4,7,8 and 14-16.

2. Victoria Exports. A Canadian exporter, Victoria Exports, will be receiving six payments of
€12,000, ranging from now to 12 months in the future. Since the company keeps cash balances in
both Canadian dollars and U.S. dollars, it can choose which currency to exchange the euros for at
the end of the various periods. Which currency appears to offer the better rates in the forward
market?

Key: find the forward premium on each currency pair

Fwd premium of C$/euro in 1 month is calculated as:
[(1.3368 – 1.336)/1.3360] * 360/30 = 0.719%
Tương tự tính fwd premium cho 2m, 3m, 6m, 12m và cho US$/euro
Sau đó tính proceeds ở cả C$ và US$ bằng cách lấy 12,000 x cho tỷ giá.
Vì Victoria Exports sẽ nhận tổng 12,000 ở 6 payments nên so sánh fwd premium ở tỷ giá nào
cao hơn thì lấy.
Ngược lại, nếu Victoria Exports sẽ trả tổng 12,000 ở 6 payments thì chọn tỷ giá nào có fwd
premium thấp hơn.

4. Credit Suisse Geneva. Andreas Broszio just started as an analyst for Credit Suisse in Geneva,
Switzerland. He receives the following quotes for Swiss francs against the dollar for spot, 1
month forward, 3 months forward, and 6 months forward.
Spot exchange rate:
Bid rate SF1.2575/$
Ask rate SF1.2585/$
1 month forward 10 to 15
3 months forward 14 to 22
6 months forward 20 to 30

a. Calculate outright quotes for bid and ask and the number of points spread between each.

Outright quotes Bid Ask Spread

1m 1.2575+0.0010 = 1.2585 1.2585+0.0015 = 1.2600 1.2600 – 1.2585 = 0.0015

3m 1.2589 1.2607 0.0018

6m 1.2595 1.2615 0.0020

b. What do you notice about the spread as quotes evolve from spot toward 6 months?
- Spread widens as the period increases
c. What is the 6-month Swiss bill rate?

7. Asian Pacific Crisis. The Asian financial crisis that began in July 1997 wreaked havoc
throughout the currrency markets of East Asia.
a. Which of the following currencies had the largest depreciations or devaluations during the July
to November period?
b. Which seemingly survived the first five months of the crisis with the least impact on their
currencies?

8. Bloomberg Currency Cross rates

8. Bloomberg Currency Cross Rates. Use the table at the top of the page from Bloomberg to
calculate each of the following:
a. Japanese yen per U.S. dollar? 83.735 JPY
b. U.S. dollars per Japanese yen? 1/83.735 USD
c. U.S. dollars per euro? 1.3247 USD
d. Euros per U.S. dollar? 1/1.3247 Euros
e. Japanese yen per euro? 110.9238 JPY
f. Euros per Japanese yen? 1/110.9238
g. Canadian dollars per U.S. dollar?
h. U.S. dollars per Canadian dollar?
i. Australian dollars per U.S. dollar?
j. U.S. dollars per Australian dollar?
k. British pounds per U.S. dollar?
l. U.S. dollars per British pound?
m. U.S. dollars per Swiss franc?
n. Swiss francs per U.S. dollar?

14. Venezuelan Bolivar (B). The Venezuelan political and economic crisis deepened in late
2002 and early 2003. On January 1, 2003, the bolivar was trading at Bs1400/$. By February 1, its
value had fallen to Bs1950/$. Many currency analysts and forecasters were predicting that the
bolivar would fall an additional 40% from its February 1 value by early summer 2003.
a. What was the percentage change in January?
-28.2%
b. What is the forecast value for June 2003?
1950/x – 1 = -40% => x = Bs3250/$
15. Indirect on the Dollar. Calculate the forward premium on the dollar (the dollar is the home
currency) if the spot rate is €1.3300/$ and the 3-month forward rate is €1.3400/$.
0.752%
16.
Chap 6: 1234 21 23
1. Pulau Penang Island Resort. Theresa Nunn is planning a 30-day vacation on Pulau Penang,
Malaysia, one year from now. The present charge for a luxury suite plus meals in Malaysian
ringgit (RM) is RM1,000/day. The Malaysian ringgit presently trades at RM5.2522/GBP. She
determines that the pound cost today for a 30-day stay would be about GBP6,000. The hotel
informs her that any increase in its room charges will be limited to an increase in the Malaysian
cost of living. Malaysian inflation is expected to be 3% per annum, while U.K. inflation is
expected to be 1%.
a. How many pounds might Theresa expect to need one year hence to pay for her 30-day
vacation?
Expected spot rate one year from now, PPP:
S2 = S1 × (1 + inflation RM)/(1 + inflation GBP) = RM5.3562/GBP
Amount of RM needed for 30-day one year from now: 1000 x 30 x 1.03= RM30,900
=> Amount of pound needed for 30-day one year from now: 30,900 x 1/5.3562 = GBP5769.01
b. By what percent will the pound cost have gone up? Why?
New pound cost: GBP5769.01
Original pound cost: 1000 x 1/5.2522 x 30 = GBP5711.89
Percentage increase in GBP = 1%
The pound cost has risen by the UK inflation rate. This is a result of Theresa’s estimation of the
future pound costs and the exchange rate changing in proportion to inflation (relative PPP).

2. Argentine Tears. The Argentine peso was fixed through a currency board at Ps1.00/$
throughout the 1990s. In January 2002, the Argentine peso was floated. On January 29, 2003, it
was trading at Ps3.20/$. During that one-year period, Argentina’s inflation rate was 20% on an
annualized basis. Inflation in the United States during that same period was 2.2% annualized.
a. What should have been the exchange rate in January 2003 if PPP held?
S2 = S1 x (1+inf peso)/(1+inf USD) = 1 x (1+0.2)/(1+0.022) = Ps1.1742/$
b. By what percentage was the Argentine peso undervalued on an annualized basis?
Percentage of peso undervaluation = 1.1742/3.2 – 1 = -63.307%
c. What were the probable causes of undervaluation?
The rapid decline of peso was due to inflation as well as a severe crisis in the balance of
payments
3. Japanese/Australia Parity Conditions. William Leon is attempting to determine whether
Japanese and Australian financial conditions are at parity. The current spot rate is a flat
¥108.33/A$, while the one-year forward rate is ¥106.50/A$. Forecast inflation is 5.00% for Japan
and 6.80% for the Australia. The one-year Japanese yen deposit rate is 7.85%, and the one-year
Australian dollar deposit rate is 9.70%.
a. Draw a diagram and calculate whether international parity conditions hold between Japan and
Australia.
Forecast Change in

Spot exchange rate

+1.72%

(Yen strengthens)

Forward premium on Forecast difference in

foreign currency
inflation rate
+1.72%
-1.8%
(Yen at premium)
(Japan lower inflation)

Difference in nominal
interest rate

-1.85%

(Less in Japan)

The markets are indeed in equilibrium – parity – and the future spot rate is projected to be
JPY106.5/AUD
b. Find the forecasted change in the Japanese yen/ Australian dollar (¥/A$) exchange rate one
year from now
Now: ¥108.33/A$
One year: ¥106.50/A$.
Forecasted change in JPY/AUD one year = 1.72%

4. Sydney to Phoenix. Terry Lamoreaux owns homes in Sydney, Australia, and Phoenix, United
States. He travels between the two cities at least twice a year. Because of his frequent trips, he
wants to buy some new high-quality luggage. He has done his research and has decided to
purchase a Briggs and Riley three piece luggage set. There are retail stores in Phoenix and
Sydney. Terry was a finance major and wants to use purchasing power parity to determine if he
is paying the same price regardless of where he makes his purchase.
a. If the price of the three-piece luggage set in Phoenix is $850 and the price of the same three-
piece set in Sydney is A$930, using purchasing power parity, is the price of the luggage truly
equal if the spot rate is A$1.0941/$?
Spot exchange rate according to PPP = price in Sydney/price in Phoenix = AUD1.0941/USD
=> Price is truly equal
b. If the price of the luggage remains the same in Phoenix one year from now, determine the
price of the luggage in Sydney in one year’s time if PPP holds true. The U.S. inflation rate is
1.15% and the Australian inflation rate is 3.13%.
S2 = 1.0941 * (1.0313/1.0115) = AUD1.1155USD
 Price of luggage in Sydney in one year = 850 * 1.1155 = $948.19

21.
23.

Chapter 7: 12349
1. Saguaro Funds. Tony Begay, a currency trader for Chicago-based Saguaro Funds, uses
futures quotes on the British pound (£) to speculate on the value of the pound. Use the futures
quotes in the table at the bottom of the page to answer the following questions.
a. If Tony buys 5 June pound futures, and the spot rate at maturity is $1.3980/£, what is the
value of her position?
Position value at maturity = 5 * 62,500 * (1.3980 – 1.4162) = -$5687.5
b. If Tony sells 12 March pound futures, and the spot rate at maturity is $1.4560/£, what is the
value of her position?
Position value = 12 * 62500 * (1.4228 – 1.4560) = -$24900
c. If Tony buys 3 March pound futures, and the spot rate at maturity is $1.4560/£, what is the
value of her position?
Position value = 3 * 62500 * (1.4560 – 1.4228) = $6225
d. If Tony sells 12 June pound futures, and the spot rate at maturity is $1.3980/£, what is the
value of her position?
Postion value = 12 * 62500 * (1.4162 – 1.3980) = $13650
2. Amber McClain. Amber McClain, the currency speculator we met in the chapter, sells eight
June futures contracts for 500,000 pesos at the closing price quoted in Exhibit 7.1.

a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?
Position value = 8 * 500000 * (0.10773 – 0.12)/10 = -$4908
b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?
Position value = 8 * 500000 * (0.10773 – 0.098)/10 = $3892
c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?
Position value = 8 * 500000 * (0.10773 – 0.11)/10 = -$908

3. Cece Cao in Jakarta. Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses
nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate. The
current spot rate is $0.6000/S$. After considerable study, she has concluded that the Singapore
dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about
$0.7000/S$. She has the following options on the Singapore dollar to choose from:

a. Should Cece buy a put on Singapore dollars or a call on Singapore dollars?

Buy a call on Singapore dollar at $0.65/S$.
b. What is Cece’s break-even price on the option purchased in part (a)?
break-even price is the price at which Hans neither gains nor loses on exercising the option
=> Break-even price = 0.65 + 0.00046 = $0.65046/S$
c. Using your answer from part (a), what is Cece’s gross profit and net profit (including
premium) if the spot rate at the end of 90 days is indeed $0.7000/S$?
Gross profit = 0.7 – 0.65 = $0.05
Net profit = 0.05 – 0.00046 = $0.04954
d. Using your answer from part (a), what is Cece’s gross profit and net profit (including
premium) if the spot rate at the end of 90 days is $0.8000/S$?
Gross profit = 0.8 – 0.65 = $0.15
Net profit = 0.15 – 0.00046 = $0.14954

4. Kapinsky Capital Geneva (A). Christoph Hoffeman trades currency for Kapinsky Capital of
Geneva. Christoph has $10 million to begin with, and he must state all profits at the end of any
speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward
rate is $1.3350/€.
a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so that he
expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do?
Buy a 30-day forward contract at $1.3350/€
Euro bought forward = 10000000 * 1/1.3350 = €7,490,636.704
Proceeds in $ = Euro bought forward * spot rate in 30 days = 7,490,636.704 * 1.3600 =
$10,187,265.92
Profits in $ = $10,187,265.92 – 10m
b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that he
expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?
Sell a 30-day fwd contract at $1.3350/€
Euros bought in spot in 30 days = 10000000*1/1.2800 = €7,812,500
Bán lại ở forward in $ = 7812500 * 1.3350 = $10,429,687.5
Profits in $ = $10,429,687.5 – 10m
9. Calling All Profits. Consider an American call option on New Zealand dollars (NZ$) with a
strike price of $0.8100/NZ$ traded at a premium of $0.0192 per NZ$ and with an expiration date
three months from now. The option is for NZ$100,000.
a. Suppose that you have bought such a call option. Plot your profit or loss on a graph should you
exercise before maturity at a time when the NZ$ is traded spot at between $0.7000/NZ$ and
$0.9200/ NZ$. Find the break-even exchange rate.

Spot rate $0.7 $0.8100 $0.8292 $0.92

Payoff 0 0 (0.8292- (0.92-

0.81)*100,000 0.81)*100,000

(Premium) 0.0192*100,000 0.0192*100,000 0.0192*100,000 0.0192*100,000

Net profit -1920 -1920 0 9080

b. Repeat (a) if you have sold such a call option.

Spot rate $0.7 $0.8100 $0.8292 $0.92

(Payoff) 0 0 -(0.8292- -(0.92-

0.81)*100,000 0.81)*100,000

Premium 0.0192*100,000 0.0192*100,000 0.0192*100,000 0.0192*100,000

Net profit 1920 1920 0 -9080

Chapter 10: 12348 10
1. BioTron Medical, Inc. Brent Bush, CFO of a medical device distributor, BioTron Medical,
Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for
its typical orders of ¥10,000,000 every other month if it were given a 5% discount. Numata’s
current terms are 90 days with no discounts. Using the following quotes and estimated cost of
capital for Numata, Bush will compare the proposal with covering yen payments with forward
contracts. Should Brent Bush accept Numata’s proposal?
Spot rate: ¥107.91/$
30-day forward rate: ¥107.66/$
90-day forward rate: ¥106.81/$
180-day forward rate: ¥105.89/$
Numata’s WACC 9.38%
BioTron’s WACC 7.85%

Compare two alternatives:

1. Allow the discount and receive payment in Yen in cash
Account receivable (yen) = 10m
Discount for cash payment up-front = 10m * 5% = 500k
Amount paid in cash net of discount = 9.5m yen
Current spot rate = Y107.91/$
=> Amount received by BioTron in $ = 9.5m * 1/107.91 = $88,036.33
2. Not offer any discount for early payment and cover exposure with forwards
Amount paid in 90 days = 10m
Buy a 90-day forward rate = Y106.81/$
Amount received in cash dollars, in 90 days = 10m*1/106.81 = $93,624.19
 Not accept the discount proposal

2. Bobcat. Bobcat, a U.S.-based manufacturer of industrial equipment, just purchased a Korean

company that produces plastic nuts and bolts for heavy equipment. The purchase price was
Won7,800 million. Won1,500 million has already been paid, and the remaining Won6,300
million is due in six months. The current spot rate is Won1,071.95/$, and the 6-month forward
rate is Won1,103.28/$. The 6-month Korean won interest rate is 12% per annum; the 6-month
U.S. dollar rate is 5% per annum. Bobcat can invest at these interest rates or borrow at 1% per
annum above those rates. A 6-month call option on won with a Won1,100/$ strike rate has a
2.83% premium, while the 6-month put option at the same strike rate has a 2.48% premium.
Bobcat can invest at the rates given above, or borrow at 1% per annum above those rates.
Bobcat’s weighted average cost of capital is 9%. Compare alternate ways that Bobcat might deal
with its foreign exchange exposure. What do you recommend and why?

Summary:
Account receivable = Won6,300 million
Spot rate: Won1,071.95/$
6m fwd rate: Won1,103.28/$
6m Kr interest rate: 12%
6m U.S. interest rate: 5%
6m Kr borrow rate: 13%
6m U.S. borrow rate: 6%
6m call option: Won1,100/$ (premium: 2.83%)
6m put option: Won1,100/$ (premium: 2.48%)
Bobcat’s WACC: 9%
Solution: Sợ Won strengthens, phải trả nhiều dollars hơn. Won càng depreciates càng tốt.
Alternative ways:
1. Unhedged
Bobcat could wait 180 days, exchange dollars for Won at that time, and make its payment.
If the spot rate remains the same in 180 days, the payment would be $5.8771 million
Certainty: uncertain
2. Forward market hedge
Bobcat could buy Won6,300 million forward, locking at Won1,103.28/$.
Payment in 6m = Won6,300 million/1,103.28 = $5.7102 million
Certainty: certain – no upfront gain
3. Money market hedge
Bobcat would exchange US dollars spot and invest them for 6 months in a Won-denominated
interest bearing account. The principal and interest in Won at the end of 6 months will be used to
pay the Won6,300 million.
In order to assure the principal and interest equal exactly Won6,300 million, Bobcat needs to
discount the Won6,300 million by the investment rate of 12% for 6 months to determine the
Won needed today:
PV of account payable = Won6,300 million/(1+0.12*180/360) = Won5,943,396,226
Bobcat needs at least Won5,943,396,226 NOW to have Won6,300 million for payment in 6
months, which is converted to dollars at spot rate as:
Won5,943,396,226/1,071.95 = $5,544,471.502
6m carried forward to the same future date to compare with other alternatives
FV = $5,544,471.502 * (1+4.5%) = $5,793,972.719
4. Option hedge: sợ phải trả nhiều dollars hơn cho Won (Won strengthens) nên buy a call
option on Won
Cost of option (premium) = Won6,300 million * spot rate * premium rate = $166,323.0561
This premium will be paid upfront regardless of whether the option is exercised or not.
Future value of option premium, by WACC = 166,323.0561 * (1+4.5%) = $173,807.5936
The strike price is Won1,100/$. If the 6 month spot rate is less than Won1,100/$ (Won
strengthens), the option will be exercised which means buying Won6,300 million at Won1,100/$.
Otherwise, the option is not exercised if the 6 month spot rate exceeds Won1,100/$. The total
cost of the call option hedge is as:
Won6,300 million/1,100 + $173,807.5936 = $5,901,080.321
 The final hedging choice depends on the exchange rate expectation and risk appetite
 The forward market hedge provides the lowest cost with certainty but no upfront gain
 If Won weakens, the money market hedge would provide the lowest cost
 If Won strengthens, the call option hedge would provide the lowest cost

3. Siam Cement. Siam Cement, the Bangkok-based cement manufacturer, suffered enormous
losses with the coming of the Asian crisis in 1997. The company had been pursuing a very
aggressive growth strategy in the mid-1990s, taking on massive quantities of foreign-currency-
denominated debt (primarily U.S. dollars). When the Thai baht (B) was devalued from its pegged
rate of B25.0/$ in July 1997, Siam’s interest payments alone were over $900 million on its
outstanding dollar debt (with an average interest rate of 8.40% on its U.S. dollar debt at that
time). Assuming Siam Cement took out $50 million in debt in June 1997 at 8.40% interest, and
had to repay it in one year when the spot exchange rate had stabilized at B42.0/$, what was the
foreign exchange loss incurred on the transaction?
Total repayment in dollar: 50m + interest payment = 50m + 0.084*50m = $54.2m
Supposed total repayment at B25.0/$:
54.2m * 25 = B1,355m
Actual total repayment at B42.0/$:
54.2m * 42 = B2276.4m
Foreign exchange loss incurred:
B2276.4m - B1,355m = B921.4m of loss
4. P&G India. Procter and Gamble’s affiliate in India, P&G India, procures much of its toiletries
product line from a Vietnamese company. Because of the shortage of working capital in India,
payment terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge
a 10 million Vietnamese dong (d) payable. Although options are not available on the Indian
rupee (R), forward rates are available against the dong. Additionally, a common practice in India
is for companies like P&G India to work with a currency agent who will, in this case, lock in the
current spot exchange rate in exchange for a 3.85% fee. Using the following exchange rate and
interest rate data, recommend a hedging strategy.
Spot rate: 346.49d/R
180-day forward rate 318.49d/R
Expected spot, 180 days 318.49d/R
180-day rupee investing rate 6.00%
180-day dong investing rate 1.80%
Currency agent’s exchange rate 3.85%
P&G India’s cost of capital 10.00%

Solution: concern that Vietnam dong will appreciates so it will take more India rupee to
exchange for 10m vnd
1. Unhedged
Payment in 180 days = 10m/318.49 = R31,398.16
2. Forward market hedge
Payment in 180 days = 10m/318.49 = R31,398.16
3. Money market hedge
Present value of account payable in vnd = 10m/(1+0.018*180/360) = vnd9,910,802.775
Present value of account payable in rupee = 9,910,802.775/346.49 = R28,603.43
 PnG needs to exchange R28,603.43 for vnd9,910,802.775 to invest in vnd-denominated
account in order to pay off their debt in 6 months
To compare with the other alternatives,
the 6month carried forward of PnG’s account payable = R28,603.43*(1+0.1*180/360) =
R30,033.6
4. Currency agent hedge
Fee for currency agent in Rupee = 10m/346.49 * 3.85% = R1,111.143
6m carried forward of fee = 1,111.143 * (1+0.05) = R1,166.7
Total payment by using currency agent hedge in 6 months = 10m/346.49 + 1,166.7 =
R30,027.562
 The money market hedge provides the least cost of payment with certainty.
8. Caribou River. Caribou River, Ltd., a Canadian manufacturer of raincoats, does not
selectively hedge its transaction exposure. Instead, if the date of the transaction is known with
certainty, all foreign currency-denominated cash flows must utilize the following mandatory
forward cover formula:

Caribou expects to receive multiple payments in Danish kroner over the next year. DKr3,000,000
is due in 90 days; DKr2,000,000 is due in 180 days; and DKr1,000,000 is due in one year. Using
the following spot and forward exchange rates, what would be the amount of forward cover
required by company policy for each period?
Spot rate, Dkr/C$ 4.70
3-month forward rate, Dkr/C$ 4.71
6-month forward rate, Dkr/C$ 4.72
12-month forward rate, Dkr/C$ 4.74

Caribou expects to receive payments in Danish kroner, which means:

 Caribou “long” Danish kroner
 Caribou buys the forward at a premium versus the Danish kroner: it receives more Danish
kroner
 Caribou pays the points forward
The amount of forward cover in
90 days: DKr3,000,000/4.71 * 100% = C$636,942.6752
180 days: DKr2,000,000/4.72 * 90% = C$381,355.9322
One year: DKr1,000,000/4.74 * 50% = C$105,485.2321

10. Mattel Toys. Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars
(Asia and the Americas) and one-third in euros (Europe). In  September, Mattel delivers a large
shipment of toys (primarily Barbies and Hot Wheels) to a major distributor in Antwerp. The
receivable, €30 million, is due in 90 days, standard terms for the toy industry in Europe. Mattel’s
treasury team has collected the following currency and market quotes. The company’s foreign
exchange advisors believe the euro will be at about $1.4200/€ in 90 days. Mattel’s management
does not use currency options in currency risk management activities. Advise Mattel as to which
hedging alternative is probably preferable.
Current spot rate ($/€) $1.4158
Credit Suisse 90-day forward rate ($/€) $1.4172
Barclays 90-day forward rate ($/€) $1.4195
Mattel Toys WACC ($) 9.600%
90-day eurodollar interest rate 4.000%
90-day euro interest rate 3.885%
90-day eurodollar borrowing rate 5.000%
90-day euro borrowing rate 5.000%

Concern of Mattel: receives less in dollar which means dollar strengthens, euro weakens.
Hedging strategy: keep the amount of receivable as much as possible or the highest dollar/euro
1. Unhedged
Expected 90-day spot rate = $1.4200/€
Amount of receivable in dollars = 30m*1.42 = $42,600,000
2. Forward market hedge
Using Barclay’s since it provides higher rate
Amount of receivable in dollars = 30m*1.4195 = $42,585,000
3. Money market hedge
Mattel borrows the exact amount of receivable at the present value in euro-denominated account
to guarantee the money received first. Then, Mattel will use the actual receivable to pay off its
borrow.
Present value of receivable in euro: 30m/(1+0.05*90/360) = euro29,629,629.63
Converted to dollar at spot rate as: 29,629,629.63 * 1.4158 = $41,949,629.63
90-day carried forward receivable: 41,949,629.63 * (1+0.096*90/360) = $42,956,420.74
 Mattel will receive $42,956,420 in 90 days
Evaluation of alternatives: the money market hedge provides Mattel the largest amount of
account receivable when using the cost of capital as reinvestment rate (carry-forward rate).
Chapter 14: 1234
1. Al-Niger Co. (Nigeria). Al-Niger Co., an oil firm headquartered in Abuja (Nigeria), borrows
€10,000,000 for one year at an annual rate of interest of 8%.
a. What is the cost of this debt in Nigerian nairas (NGN) if the euro depreciates from NGN225/€
to NGN200/€ over the year?
Amount of borrow in NGN = €10,000,000 * 225 = NGN2,250,000,000
Principal and interest payment in NGN = 10,000,000 * (1+0.08) * 200 = NGN2,160,000,000
Cost of debt in NGN = 2,160,000,000/2,225,000,000 – 1 = -0.04
b. What is the cost of this debt in Nigerian nairas (NGN) if the euro appreciates from NGN 225/€
to NGN250/€ over the year?
kd in NGN = [(1+kd in euro) * (1 + spread)] – 1 = 0.2

2. Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter
demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very
different effective rate of interest than what it expected. Using the same baseline values of a debt
principal of SF1.5 million, a one year period, an initial spot rate of SF1.5000/$, a 5.000% cost of
debt, and a 34% tax rate, what is the effective cost of debt for one year for a U.S. dollar based
company if the exchange rate at the end of the period was:
a. SF1.5000/$
effective kd in $ = [(1+kd in SF) * (1+spread)] – 1 = 0.05
b. SF1.4400/$
effective kd in $ = [(1+kd in SF) * (1+spread)] – 1 = 0.09375
c. SF1.3860/$
effective kd in $ = = [(1+kd in SF) * (1+spread)] – 1 = 0.1363
d. SF1.6240/$
effective kd in $ = [(1+kd in SF) * (1+spread)] – 1 = -0.0302

3. MAN Invest (U.K.). MAN Invest, a U.K.-based investment partnership, borrows

€100,000,000 at a time when the exchange rate is $1.3460/€. The entire principal is to be repaid
in three years, and interest is 7% per annum, paid annually in euros. The euro is expected to
depreciate vis-à-vis the British pound at 8% per annum. What is the effective cost of this loan for
MAN Invest?
4. Inter-KSA (Saudi Arabia). Inter-KSA is a Saudi Arabian airline company specializing in
internal flights that needs €50,000,000 for one year to finance working capital. The airline firm
has two alternatives for borrowing:
a. Borrow €50,000,000 in Paris at 7% per annum.
Principal and interest payment = 50,000,000 * (1+0.07) = euro53,500,000
b. Borrow Saudi riyals SAR 225,000,000 in Saudi Arabia at 9% per annum and then exchange
the riyals at the cross rate of 1 EUR = 4.5 SAR.
Principal and interest payment in euro = 225,000,000 * 1.09 / 4.5 = euro54,500,000
At what ending exchange rate would Inter-KSA be indifferent between borrowing euros and
borrowing Saudi riyals?
Break-even exchange rate (x): 50,000,000 * (1+0.07) = 225,000,000 * 1.09 / x
 x = 4.58411215 SAR/EUR

Chapter 16: 1,2,5,7,12

1. Nikken Microsystems (A). Assume Nikken Microsystems has sold Internet servers to
Telecom España for €700,000. Payment is due in three months and will be made with a trade
acceptance from Telecom España Acceptance. The acceptance fee is 1.0% per annum of the
face amount of the note. This acceptance will be sold at a 4% per annum discount. What is the
annualized percentage all-in cost in euros of this method of trade financing?
Net proceeds = 700,000 – 700,000*0.01*90/360 - 700,000*0.04*90/360 = euro691,250
Annualized percentage all-in-cost = (acceptance fee + discount)/proceeds * 360/90 = 0.05063

2. Nikken Microsystems (B). Assume that Nikken Microsystems prefers to receive British
pounds rather than euros for the trade transaction described in Problem 1. It is considering two
alternatives: (1) sell the acceptance for euros at once and convert the euros immediately to
pounds at the cross spot rate of exchange of £0.72/€ or (2) hold the euro acceptance until
maturity but at the start sell the expected euro proceeds forward for dollars at the 3-month
forward rate of £0.75/€.
a. What are the British pound net proceeds received at once from the discounted trade acceptance
in alternative 1?
Net proceeds when selling the acceptance at once in pounds = 691,250 * 0.75 = £518,437.5
b. What are the pound net proceeds received in three months in alternative 2?
Net proceeds in euro hold until maturity = 700,000 – 700,000*0.01*90/360 = euro698,250
Amount received by selling forward in 3 months = 698,250*0.75 = £523,687.5
c. What is the break-even investment rate that would equalize the net pound proceeds from both
alternatives?
£518,437.5 * (1+X*90/360) = £523,687.5 => X = 0.0405
d. Which alternative should Nikken Microsystems choose?
If its WACC is 4.05%, no need to care. If Nikken wants to improve its liquidity => option 1. If
not, obviously the forward one. It only takes 3 months man!

5. Alliasha-Toshiba. Alliasha-Toshiba buys its laptops from Toshiba-France, and sells them to
French customers. One of its customers is Pret-a-Print, a printing service firm that buys laptops
from Alliasha-Toshiba at the wholesale price. Final payment is due to Alliasha-Toshiba in three
months. Pret-a-Print bought €175,000 worth of laptops from Alliasha-Toshiba, with a cash down
payment of €35,000 and the balance due in 3 months without any interest charged as a sales
incentive. Alliasha-Toshiba will have the Pret-a-Print receivable accepted by Alliance
Acceptance for a 3.5% fee and then sell it at a 5% per annum discount to BNP Paribas.
a. What is the annualized percentage all-in cost to Alliasha-Toshiba?
Alliasha-Toshiba account receivable = 175,000 - 35,000 = €140,000
Alliasha-Toshiba net proceeds = 140,000 * (1 – 0.035*90/360 – 0.05*90/360) = €137,025
Alliasha-Toshiba’s annualized percentage of AIC = 140,000*(0.035*90/360 + 0.05*90/360)/
137,025 * 360/90 = 0.08685
b. What are Alliasha-Toshiba’s net cash proceeds, including the cash down payment?
Net cash proceeds with cash down payment = 137,025 + 35,000 = €172,025

7. BollyIndia Enterprises (A). BollyIndia Enterprises has sold a combination of films and
DVDs to Brazilia Media Incorporated for €1,000,000, with payment due in 3 months. BollyIndia
Enterprises has the following alternatives for financing this receivable: (1) Use its bank credit
line. Interest would be at the prime rate of 8% plus 250 basis points per annum. BollyIndia
Enterprises would need to maintain a compensating balance of 20% of the loan’s face amount.
No interest will be paid on the compensating balance by the bank. (2) Use its bank credit line but
purchase export credit insurance for a 1% fee. Because of the reduced risk, the bank interest rate
would be reduced to 5% per annum without any points.
a. What are the annualized percentage all-in-costs of each alternative?
b. What are the advantages and disadvantages of each alternative?
c. Which alternative would you recommend?