财务管理基础英文版第八版教学设计

CHAPTER 19 MULTINATIONAL CASH MANAGEMENTANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. Describe the key factors contributing to effective cash management within a firm. Why is the cash management process more difficult in a MNC?Answer: An effective cash management system should be based on a cash budget that projects expected cash inflows and outflows over some planning horizon. It provides for the systematic receipt and disbursement of cash. It also provides for funds mobilization, where cash shortages are covered by borrowing at the most favorable rates and surplus funds are invested at the most advantageous rates. Within a MNC the complexity of the cash management process is compounded because the firm does business in a variety of currencies, and hence the cost of foreign exchange transactions is an additional dimension to be managed.2. Discuss the pros and cons of a MNC having a centralized cash manager handle all investment and borrowing for all affiliates of the MNC versus each affiliate having a local manager who performs the cash management activities of the affiliate.Answer: Under a centralized cash management system, the cash manager will have a global view of the cash requirements of the MNC. There will be less chance that funds will be mislocated, i.e., denominated in the wrong currency. Additionally, under a global view, transaction exposure for the MNC can be more efficiently managed. Moreover, a centralized system readily allows for investing excess cash at the most advantageous rates and borrowing to cover cash shortages at the most favorable rates.Under a decentralized system, the local cash manager is given more responsibility for managing the cash needs of the affiliate than under a centralized system. Consequently, the local cash management position serves as good training for higher level positions within the affiliate or MNC. Also, under a decentralized system, local bank relationships are better developed since the affiliate conducts more of its cash management functions at the local level. This may prove important if funds need to be borrowed locally. But overall, the benefits of a centralized cash management system tend to outweigh its disadvantages.PROBLEMS1. Assume that interaffiliate cash flows are uncorrelated with one another. Calculate the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members:Expected StandardAffiliate Transactions Deviation_______________________________________________U.S. $100,000 $40,000Canada $150,000 $60,000Mexico $175,000 $30,000Chile $200,000 $70,000Solution: Portfolio standard deviation = Square root of [($40,000)2+ ($60,000)2+ ($30,000)2 + ($70,000)2] = $104,881.MINI CASE: EFFICIENT FUNDS FLOW AT EASTERN TRADING COMPANYThe Eastern Trading Company of Singapore purchases spices in bulk from around the world, packages them into consumer-size quantities, and sells them through sales affiliates in Hong Kong, the United Kingdom, and the United States. For a recent month, the following payments matrix of interaffiliate cash flows, stated in Singapore dollars, was forecasted. Show how Eastern Trading can use multilateral netting to minimize the foreign exchange transactions necessary to settle interaffiliate payments. If foreign exchange transactions cost the company .5 percent, what savings result from netting?Suggested Solution to Mini Case 1: Efficient Funds Flow at Eastern Trading CompanyBilateral NettingMultilateral NettingWithout netting, S$277,000 of interaffiliate foreign exchange transactions occur among the four affiliates of Eastern Trading. With multilateral netting, interaffiliate foreign exchange transactions are reduced to S$136,000, or by S$141,000. The savings are .005 x S$141,000 = S$705 for the planning period.MINI CASE : EASTERN TRADING COMPANY’S NEW M.B.A.The Eastern Trading Company of Singapore presently follows a decentralized system of cash management where it and its affiliates each maintain their own transaction and precautionary cash balances. Eastern Trading believes that it and its affiliates’ cash needs are normally distributed and independent from one another. It is corporate policy to maintain two and one-half standard deviations of cash as precautionary holdings. At this level of safety there is a 99.37 percent chance that each affiliate will have enough cash holdings to cover transactions. A new MBA hired by the company claims that the investment in precautionary cash balances is needlessly large and can be reduced substantially if the firm converts to a centralized cash management system. Use the projected information for the current month, which is presented below, to determine the amount of cash Eastern Trading needs to hold in precautionary balances under its current decentralized system and the level of precautionary cash it wouldneed to hold under a centralized system. Was the new MBA a good hire?Suggested Solution to Mini Case 2: E astern Trading Company’s New M.B.A.Eastern Trading is holding S$350,000 to cover expected transactions and S$350,000 as precautionary balances among the four affiliates. In total, it is holding S$700,000 under its decentralized cash management system.If Eastern Trading views its cash needs from a portfolio perspective under a centralized cash management system, one portfolio standard deviation of cash would be:$71,063 S=) $35,000 (S + ) $40,000 (S + ) $25,000 (S + ) $40,000 (S =.Dev . Std Portfolio 2 2 2 2Hence, under a centralized system, Eastern Trading would continue to need S$350,000 tocover expected transactions, but precautionary cash balances could be reduced to $177,658 (= 2.5 x S$71,063). Thus, the investment in precautionary cash can be reduced by S$172,342 (= S$350,000 – 177,658). The new MBA was a good hire.。

CHAPTER 20 INTERNATIONAL TRADE FINANCEANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. Discuss some of the reasons why international trade is more difficult and risky from the exporter’s perspective than is domestic trade.Answer: International trade is more difficult and risky for a firm than is domestic trade. In foreign trade, the exporter may not be familiar with the buyer, and thus not know if the importer is creditworthy. If merchandise is exported abroad and the buyer does not pay, it may prove difficult, if not impossible, for the exporter to have any legal recourse. Additionally, political instability makes it risky to ship merchandise abroad to certain parts of the world.2. What three basic documents are necessary to conduct a typical foreign commerce trade? Briefly discuss the purpose of each.Answer: The three basic documents necessary to conduct a typical foreign commerce trade are: letter of credit, time draft, and a bill of lading. A letter of credit (L/C) is a guarantee from the importer’s bank that it will act on behalf of the importer and pay the exporter for the merchandise if all relevant documents specified in the L/C are presented according to the terms of L/C. A time draft is a written order in structing the importer or his agent, the importer’s bank, to pay the amount specified on its face on a certain date. A bill of lading (B/L) is a document issued by the common carrier specifying that it has received the goods for shipment; it can serve as title to the goods.3. How does a time draft become a banker’s acceptance?Answer: When the goods are shipped by the exporter via common carrier, the exporter’s bank presents the shipping documents and the time draft to the importer’s bank. After tak ing title to the goods via the bill of lading, the importer’s bank accepts the time draft, creating at this point a banker’s acceptance (B/A). A B/A is a money market instrument for which a secondary market exists.4. Discuss the various ways the exporter can receive payment in a foreign trade transaction after the importer’s bank accepts the exporter’s time draft and it becomes a banker’s acceptance.Answer: The exporter can hold the B/A until maturity and present it to the importer’s bank for payment at face value. Alternatively, the exporter can receive the discounted value at inception from its bank, or sell it at its current discounted value in the money market prior to maturity.5. What is a forfaiting transaction?Answer: Forfaiting is a form of medium-term trade financing used to finance the sale of capital goods. A forfaiting transaction involves the sale by the exporter of promissory notes signed by the exporter in favor of the importer. The forfait, usually a bank, buys the notes at a discount from face value. The forfait does not have recourse against the exporter in the event of default by the importer. The promissory notes typically extend out in a series over a period of three to five years, with a note in the series maturing every six months.6. What is the purpose of the Export-Import Bank?Answer: The Export-Import Bank (Eximbank) of the United States was founded as an independent government agency to facilitate and finance U.S. export trade. Eximbank’s purpose is to provide financing in situations where private financial institutions are unable or unwilling because: i) the loan maturity was too long; ii) the amount of the loan was too large; iii) the loan risk was too great; and, iv) where the importing firm had difficulty obtaining hard currency for payment. To meet its objectives, Eximbank provides service through three types of programs: direct loans to foreign borrowers, loan guarantees, and credit insurance.7. Do you think that a country’s government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?Answer: When a country’s government offers below-market financing directly to foreign importers, or offers loan guarantees to domestic banks financing the foreign import, or provides low cost credit insurance to U.S. exporters to alleviate the commercial and political risk in the sale, it is using taxpayers’ money to subsidize foreign trade. Consequently, the foreign trade isnot paying for itself. Nevertheless, if most governments of developed countries offer such assistance to their domestic exporters, it is difficult for one to refuse if the country desires to have its export-oriented industries remain competitive.8. Briefly discuss the various types of countertrade.Answer: Countertrade is an umbrella term used to describe six types of international trade: barter, clearing arrangement, switch trading, buy-back, counterpurchase, and offset. The first three do not involve the use of money, whereas the later three do.Barter is the direct exchange of goods between two parties. While money does not exchange hands in a barter transaction, it is common to value the goods each party exchanges in an agreed-upon currency. A clearing arrangement is a form of barter in which the counterparties contract to purchase a certain amount of goods and services from one another. Both parties set up accounts with each other that are debited whenever one country imports from the other. The clearing arrangement introduces the concept of credit to barter transactions, and means bilateral trade can take place that does not have to be immediately settled. A switch trade is the purchase by a third party of one country’s clearing agreement imbalance fo r hard currency, which is in turn resold. The second buyer uses the account balance to purchase goods and services from the original clearing agreement counterparty that had the account imbalance.A buy-back transaction involves a technology transfer via the sale of a manufacturing plant. As part of the transaction, the seller agrees to purchase a certain portion of the plant output once it is constructed. First, the plant buyer borrows hard currency in the capital market to pay the seller for the plant. Second, the plant seller agrees to purchase enough of the plant output over a period of time to enable the buyer to pay back the borrowed funds. A counterpurchase is similar to a buy-back transaction, but with some notable differences. The major difference between a buy-back and a counterpurchase transaction is that in the latter, the seller agrees to purchase unrelated merchandise that has not been produced on the exported equipment. The seller agrees to purchase goods from a list drawn up by the importer at prices set by the importer. The list frequently includes items the buyer may be experiencing difficulty in selling. An offset transaction can be viewed as a counterpurchase trade agreement involving the aerospace/defense industry.9. Discuss so me of the pros and cons of countertrade from the country’s perspective and thefirm’s perspective.Answer: Arguments both for and against countertrade transactions can be made. There are both negative and positive incentives for a country to be in favor of countertrade. Negative incentives are those that are forced upon a country or corporations whether or not they desire to engage in countertrade. Negative reasons include: the conservation of cash and hard currency, the improvement of trade imbalances, and the maintenance of export prices. Positive reasons from both the country and corporate perspectives include: enhanced economic development, increased employment, technology transfer, market expansion, increased profitability, less costly sourcing of supply, reduction of surplus goods from inventory, and the development of marketing expertise.Those against countertrade transactions claim that such transactions tamper with the fundamental operation of free markets, and therefore, resources are used inefficiently. Opponents claim that transaction costs are increased, that multilateral trade is restricted through fostering bilateral trade agreements, and that, in general, transactions that do not make use of money represent a step backwards in economic development.10. What is the difference between a buy-back transaction and a counterpurchase?Answer: A buy-back transaction involves a technology transfer via the sale of a manufacturing plant. As part of the transaction, the seller agrees to purchase a certain portion of the plant output once it is constructed to enable the buyer to pay back the borrowed funds. In a counterpurchase, the seller agrees to purchase unrelated merchandise that has not been produced on the exported equipment. Generally, the seller agrees to purchase goods from a list drawn up by the importer at prices set by the importer. The list frequently includes items the buyer may be experiencing difficulty in selling.PROBLEMS1. Assume the time from acceptance to maturity on a $2,000,000 banker’s acceptance is 90 days. Further assume that the importing bank’s acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 7 percent. Determine the amount the exporter will receive if he holds the B/A until maturity and also the amount the exporter will receive if he discounts the B/A with the importer’s bank.Solution: The exporter will receive $1,993,750 = $2,000,000 x [1 - (.0125 x 90/360)] if he holds the B/A to maturity. The acceptance commission is $6,250. The exporter will receive $1,958,750 = $2,000,000 x [1 - ((.0700 + .0125) x 90/360)] if he discounts the B/A with the importer’s bank.2. The time from acceptance to maturity on a $1,000,000 banker’s acceptance is 120 days. The importer’s bank’s acceptance commission is 1.75 percent and the market rate for 120-day B/As is 5.75 percent. What amount will the exporter receive if he holds the B/A until maturity? If he discounts the B/A with the importer’s bank? Also determine the bond equivalent y ield the importer’s bank will earn from discounting the B/A with the exporter. If the exporter’s opportunity cost of capital is 11 percent, should he discount the B/A or hold it to maturity?Solution: If the exporter holds the B/A until maturity, he will receive $994,166.67 = $1,000,000 x [1 - (.0175 x 120/360)]. Thus, the acceptance commission is $5,833.33.If the exporter discounts the B/A he will receive $975,000 = $1,000,000x [1 - ((.0575 + .0175) x 120/360)].The importer’s bank receives a discoun t rate of interest of 7.5 percent (= 5.75 + 1.75 percent) on its investment. At maturity it will receive $1,000,000 from the importer. The bond equivalent yield the importer’s bank earns on its investment is 7.8 percent, or .078 = ($1,000,000/$975,000 - 1) x 365/120.The exporter pays the acceptance commission regardless of whether he discounts the B/A or holds it to maturity. The bond equivalent rate the exporter receives from discounting the B/A is 5.98 percent, or .0598 = ($994,166.67/$975,000 - 1) x 365/120. Since the exporter’s opportunity cost of capital is 11 percent, which is greater than 5.98 percent compounded tri-annually (an effective annual rate of 6.10 percent), he should discount the B/A.MINI CASE: AMERICAN MACHINE TOOLS, INC.American Machine Tools is a mid-western manufacturer of tool-and-die-making equipment. The company has had an inquiry from a representative of the Estonian government about the terms of sale for a $5,000,000 order of machinery. The sales manager spoke with the Estonian representative, but he is doubtful that the Estonian government will be able to obtain enough hard currency to make the purchase. While the U.S. economy has been growing, AmericanMachine Tools has not had a very good year. An additional $5,000,000 in sales would definitely help. If something cannot be arranged, the firm will likely be forced to lay off some of its skilled workforce.Is there a way that you can think of that American Machine Tools might be able to make the machinery sale to Estonia?Suggested Solution to American Tools, Inc.American Machine Tools needs a manager in charge of countertrade. This manage would be skilled in negotiating trades for his firm’s machine tools. Since the U.S. economy is fairly strong, there are two types of countertrades that might work with the Estonian government and help American Machine Tools consummate the sale: a buy-back transaction or a countertrade.In a buy-back transaction, the Estonian government would issue debt denominated in a hard currency to obtain the funds to purchase the equipment from American Machine Tools. It should be able to obtain hard currency debt financing if it is likely that it can service the debt. American Machine Tools, in turn, would agree to buy in dollars from the Estonian tool and die manufacturer enough of the output produced on the machinery to enable it to meet the debt service obligations. A countertrade works similarly, except that American Machine Tools would agree to purchase enough other goods produced in Estonia to enable the hard currency debt service obligations to be met. Either of these two types of countertrade would work if American Machine Tools has the sales ability to market the Estonia output in the U.S., or elsewhere.。

CHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURE SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.Answer: Under the monetary/nonmonetary method, all monetary balance sheet accounts of a foreign subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the historical rate exchange rate in effect when the account was first recorded. Under the temporal method, monetary accounts are translated at the current exchange rate. Other balance sheet accounts are also translated at the current rate, if they are carried on the books at current value. If they are carried at historical value, they are translated at the rate in effect on the date the item was put on the books. Since fixed assets and inventory are usually carried at historical costs, the temporal method and the monetary/nonmonetary method will typically provide the same translation.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?Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the “cumulative translation adjustment” account. Nothing passes through the income statement. The other three translation methods pass foreign exchange gains or losses through the income statement before they enter on to the balance sheet through the accumulated retained earnings account.3. Identify some instances under FASB 52 when a foreign entity’s functiona l currency would be the same as the parent firm’s currency.Answer: Three examples under FASB 52, where the foreign entity’s functional currency will be the same as the parent firm’s currency, are: i) the foreign entity’s cash flows directly affect the p arent’s cash flows and are readily available for remittance to the parent firm; ii) the sales pricesfor the foreign entity’s products are responsive on a short-term basis to exchange rate changes, where sales prices are determined through worldwide competition; and, iii) the sales market is primarily located in the parent’s country or sales contracts are denominated in the parent’s currency.4. Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different than its functional currency.Answer: For a foreign entity that keeps its books in its local currency, which is different from its functional currency, the translation process according to FASB 52 is to: first, remeasure the financial reports from the local currency into the functional currency using the temporal method of translation, and second, translate from the functional currency into the reporting currency using the current rate method of translation.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.Answer: Since it is, generally, not possible to completely eliminate both transaction and translation exposure, we recommend that transaction exposure be given first priority since it involves real cash flows. The translation process, on-the-other hand, has no direct effect on reporting currency cash flows, and will only have a realizable effect on net investment upon the sale or liquidation of the assets.There are two common methods for controlling translation exposure: a balance sheet hedge and a derivatives hedge. The balance sheet hedge involves equating the amount of exposed assets in an exposure currency with the exposed liabilities in that currency, so the net exposure is zero. Thus when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change in liabilities. To create a balance sheet hedge, once transaction exposure has been controlled, often means creating new transaction exposure. This is not wise since real cash flow losses can result. A derivativeshedge is not really a hedge, but rather a speculative position, since the size of the “hedge” is based on the future expected spot rate of exchange for the exposure currency with the reporting currency. If the actual sp ot rate differs from the expected rate, the “hedge” may result in the loss of real cash flows.PROBLEMS1. Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.6 in the text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: The following table provides a translation exposure report for Centralia Corporation and its affiliates under FASB 8, which is essentially the temporal method of translation. The difference between the new report and Exhibit 10.6 is that nonmonetary accounts such as inventory and fixed assets are translated at the historical exchange rate if they are carried at historical costs. Thus, these accounts will not change values when exchange rates change and they do not create translation exposure.Examination of the table indicates that under FASB 8 there is negative net exposure for the Mexican peso and the euro, whereas under FASB 52 the net exposure for these currencies is positive. There is no change in net exposure for the Canadian dollar and the Swiss franc. Consequently, if the euro depreciates against the dollar from €1.1000/$1.00 to €1.1786/$1.00, as the text example assumed, exposed assets will now fall in value by a smaller amount than exposed liabilities, instead of vice versa. The associated reporting currency imbalance will be $239,415, calculated as follows:Reporting Currency Imbalance=-€3,949,0000€1.1786/$1.00--€3,949,0000€1.1000/$1.00=$239,415.Translation Exposure Report under FASB 8 for Centralia Corporation and its Mexican and Spanish Affiliates, December 31, 2016 (in 000 Currency Units)Canadian Dollar MexicanPeso EuroSwissFrancAssetsCash CD200 Ps 6,000 € 825SF 0 Accounts receivable 0 9,000 1,045 0 Inventory 0 0 0 0 Net fixed assets 0 0 0 0Exposed assets CD200 Ps15,000 € 1,870SF 0LiabilitiesAccounts payable CD 0 Ps 7,000 € 1,364SF 0 Notes payable 0 17,000 935 1,400 Long-term debt 0 27,000 3,520 0Exposed liabilities CD 0 Ps51,000 € 5,819SF1,400Net exposure CD200 (Ps36,000) (€3,949)(SF1,400)2. Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the euro from €1.1000/$1.00 to €1.1786/$1.00 that is the counterpart to Exhibit 10.7 in the text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: This problem is the sequel to Problem 1. The solution to Problem 1 showed that if the euro depreciated there would be a reporting currency imbalance of $239,415. Under FASB 8 this is carried through the income statement as a foreign exchange gain to the retained earnings on the balance sheet. The following table shows that consolidated retained earnings increased to $4,190,000 from $3,950,000 in Exhibit 10.7. This is an increase of $240,000, which is the same as the reporting currency imbalance after accounting for rounding error.Note to instructor: Since Centralia and its affiliates carry inventory and fixed assets on the books at historical values, the monetary/monetary method (essentially IAS 21) will produce the same translation.Consolidated Balance Sheet under FASB 8 for Centralia Corporation and its Mexican anda This includes CD200,000 the parent firm has in a Canadian bank, carried as $150,000. CD200,000/(CD1.3333/$1.00) = $150,000.b$1,750,000 - $300,000 (= Ps3,000,000/(Ps10.00/$1.00)) intracompany loan = $1,450,000.c,d Investment in affiliates cancels with the net worth of the affiliates in the consolidation.e The Spanish affiliate owes a Swiss bank SF375,000 (÷ SF1.2727/€1.00 = €294,649). This is carried on the books, after the exchange rate change, as part of €1,229,649 = €294,649 + €935,000. €1,229,649/(€1.1786/$1.00) = $1,043,313.3. In Example 10.2, a forward contract was used to establish a derivatives “hedge” to protect Centralia from a translation loss if the euro depreciated from €1.1000/$1.00 to €1.1786/$1.00. Assume that an over-the-counter put option on the euro with a strike price of €1.1393/$1.00 (or $0.8777/€1.00) can be purchased for $0.0088 per euro. Show how the potential translation loss can be “hedged” with an option contract.Solution: As in example 10.2, if the potential translation loss is $110,704, the equivalent amount in functional currency that needs to be hedged is €3,782,468. If in fact the euro does depreciate to €1.1786/$1.00 ($0.8485/€1.00), €3,782,468 can be purchased in the spot market for $3,209,289. At a striking price of €1.1393/$1.00, the €3,782,468 can be sold through the put for $3,319,993, yielding a gross profit of $110,704. The put option cost $33,286 (= €3,782,468 x $0.0088). Thus, at an exchange rate of €1.1786/$1.00, the put option will effectively hedge $110,704 - $33,286 = $77,418 of the potential translation loss. At terminal exchange rates of €1.1393/$1.00 to €1.1786/$1.00, the put option hedge will be less effective. An option contract does not have to be exercised if doing so is disadvantageous to the option owner. Therefore, the put will not be exercised at exchange rates less than €1.1393/$1.00 (more than $0.8777/€1.00), in which case the “hedge” will lose the $33,286 cost of the option.MINI CASE: SUNDANCE SPORTING GOODS, INC.Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sporting goods--principally golf, tennis and other racquet equipment, and also lawn sports, such as croquet and badminton-- with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25 = Ps3.30 = A1.00 = ¥105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table.Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican anda The parent firm is owed Ps1,320,000 by the Mexican affiliate. This sum is included in the parent’s accounts receivable as $400,000, translated at Ps3.30/$1.00. The remainder of the parent’s (Mexican affiliate’s) accounts receivable (payable) is denominated in dollars (pesos).b The Mexican affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $2,400,000. This represents the sum of the common stock (Ps4,500,000) and retained earnings (Ps3,420,000) on the Mexican affiliate’s books, translated at Ps3.30/$1.00.c The Canadian affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $3,600,000. This represents the sum of the common stock (CD2,900,000) and the retained earnings (CD1,600,000) on the Canadian affiliate’s books, translated at CD1.25/$1.00.d The parent firm has outstanding notes payable of ¥126,000,000 due a Japanese bank. This s um is carried on the parent firm’s books as $1,200,000, translated at ¥105/$1.00. Other notes payable are denominated in U.S. dollars.e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This sum is carried on the Mexican affiliate’s books as Ps396,000, translated at A1.00/Ps3.30. Other accounts receivable are denominated in Mexican pesos.f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This sum is carried on t he Canadian affiliate’s books as CD300,000, translated at W800/CD1.25. Other accounts receivable are denominated in Canadian dollars.You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as a MNC. She has also asked you to address in your analysis the relationship between the firm’s translation exposure and its transaction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written.a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52.b. i. Prepare a translation exposure report for Sundance Sporting Goods, Inc., and its two affiliates.ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which the firm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = ¥105 = W800 to $1.00 = CD1.30 = Ps3.30 = A1.03 = ¥105 = W800.c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC.d. i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures.ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged.Suggested Solution to Sundance Sporting Goods, Inc.Note to Instructor: It is not necessary to assign the entire case problem. Parts a. and b.i. can be used as self-contained problems, respectively, on basic balance sheet consolidation and the preparation of a translation exposure report.a. Below is the consolidated balance sheet for the MNC prepared according to the current rate method prescribed by FASB 52. Note that the balance sheet balances. That is, Total Assets and Total Liabilities and Net Worth equal one another. Thus, the assumption is that the current exchange rates are the same as when the affiliates were established. This assumption is relaxed in part c.Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian Affiliates,December 31, 2016: Pre-Exchange Rate Change (in 000 Dollars)Sundance, Inc.(parent) MexicanAffiliateCanadianAffiliateConsolidatedBalancea$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.b,c The investment in the affiliates cancels with the net worth of the affiliates in the consolidation.d The parent owes a Japanese bank ¥126,000,000. This is carried on the books as $1,200,000 (=¥126,000,000/(¥105/$1.00)).e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This is carried on the Mexican affiliate’s books as Ps396,000 (= A120,000 x Ps3.30/A1.00).f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This is carried on the Canadia n affiliate’s books as CD300,000 (= W192,000,000/(W800/CD1.25)).b. i. Below is presented the translation exposure report for the Sundance MNC. Note, from the report that there is net positive exposure in the Mexican peso, Canadian dollar, Argentine austral and Korean won. If any of these exposure currencies appreciates (depreciates) against the U.S. dollar, exposed assets denominated in these currencies will increase (fall) in translated value by a greater amount than the exposed liabilities denominated in these currencies. There is negative net exposure in the Japanese yen. If the yen appreciates (depreciates) against the U.S. dollar, exposed assets denominated in the yen will increase (fall) in translated value by smaller amount than the exposed liabilities denominated in the yen.Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian Affiliates, December 31, 2016 (in 000 Currency Units)b. ii. The problem assumes that Canadian dollar depreciates from CD1.25/$1.00 to CD1.30/$1.00 and that the Argentine austral depreciates from A1.00/$1.00 to A1.03/$1.00. To determine the reporting currency imbalance in translated value caused by these exchange rate changes, we can use the following formula:Net Exposure Currency i S(i/reporting)-Net Exposure Currency i S(i/reporting)new old = Reporting Currency Imbalance.From the translation exposure report we can determine that the depreciation in the Canadian dollar will cause aCD4,200,000 CD1.30/$1.00-CD4,200,000CD1.25/$1.00= -$129,231reporting currency imbalance.Similarly, the depreciation in the Argentine austral will cause aA120,000 A1.03/$1.00-A120,000A1.00/$1.00= -$3,495reporting currency imbalance.In total, the depreciation of the Canadian dollar and the Argentine austral will cause a reporting currency imbalance in translated value equal to -$129,231 -$3,495= -$132,726.c. The new consolidated balance sheet for Sundance MNC after the depreciation of the Canadian dollar and the Argentine austral is presented below. Note that in order for the new consolidated balance sheet to balance after the exchange rate change, it is necessary to have a cumulative translation adjustment account balance of -$133 thousand, which is the amount of the reporting currency imbalance determined in part b. ii (rounded to the nearest thousand).Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian Affiliates,December 31, 2016: Post-Exchange Rate Change (in 000 Dollars)a$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.b,c The investment in the affiliates cancels with the net worth of the affiliates in the consolidation.d The parent owes a Japanese bank ¥126,000,000. This is carried on the books as $1,200,000 (=¥126,000,000/(¥105/$1.00)).e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This is carried on the Mexican affiliate’s books as Ps384,466 (= A120,000 x Ps3.30/A1.03).f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This is carried on the Canadian affiliate’s books as CD312,000 (=W192,000,000/(W800/CD1.30)).d. i. The transaction exposure report for Sundance, Inc. and its two affiliates is presented below. The report indicates that the Ps1,320,000 accounts receivable due from the Mexican affiliate is not also a translation exposure because this is netted out in the consolidation. However, the ¥126,000,000 notes payable of the parent is also a translation exposure. Additionally, the A120,000 accounts receivable of the Mexican affiliate and the W192,000,000 accounts receivable of the Canadian affiliate are both translation exposures.Transaction Exposure Report for Sundance Sporting Goods, Inc. andits Mexican and Canadian Affiliates, December 31, 2016d. ii. Since transaction exposure may potentially result in real cash flow losses while translation exposure does not have an immediate direct effect on operating cash flows, we will first address the transaction exposure that confronts Sundance and its affiliates. The analysis assumes the depreciation in the Canadian dollar and the Argentine austral have already taken place.The parent firm can pay off the ¥126,000,000 loan from the Japanese bank using funds from the cash account and money from accounts receivable that it will collect. Additionally, the parent firm can collect the accounts receivable of Ps1,320,000 from its Mexican affiliate that is carried on the books as $400,000. In turn, the Mexican affiliate can collect the A120,000 accounts receivable from the Argentine importer, valued at Ps384,466 after the depreciation in the austral, to guard against further depreciation and to use to partially pay off the peso liability to the parent. The Canadian affiliate can eliminate its transaction exposure by collecting the W192,000,000 accounts receivable as soon as possible, which is currently valued at CD312,000.The elimination of these transaction exposures will affect the translation exposure of Sundance MNC. A revised translation exposure report follows.Revised Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian Affiliates, December 31, 2016 (in 000 Currency Units)Note from the revised translation exposure report that the elimination of the transaction exposure will also eliminate the translation exposure in the Japanese yen, Argentine austral and the Korean won. Moreover, the net translation exposure in the Mexican peso has been reduced. But the net translation exposure in the Canadian dollar has increased as a result of the Canadian affiliate’s collection of the won receivable.The remaining translation exposure can be hedged using a balance sheet hedge or a derivatives hedge. Use of a balance sheet hedge is likely to create new transaction exposure, however. Use of a derivatives hedge is actually speculative, and not a real hedge, since the size of the “hedge” is based on one’s expectation as to the future sp ot exchange rate. An incorrect estimate will result in the “hedge” losing money for the MNC.。

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. Explain the basic differences between the operation of a currency forward market and a futures market.Answer: The forward market is an OTC market where the forward contract for purchase or sale of foreign currency is tailor-made between the client and its international bank. No money changes hands until the maturity date of the contract when delivery and receipt are typically made. A futures contract is an exchange-traded instrument with standardized features specifying contract size and delivery date. Futures contracts are marked-to-market daily to reflect changes in the settlement price. Delivery is seldom made in a futures market. Rather a reversing trade is made to close out a long or short position.2. In order for a derivatives market to function most efficiently, two types of economic agents are needed: hedgers and speculators. Explain.Answer: Two types of market participants are necessary for the efficient operation of a derivatives market: speculators and hedgers. A speculator attempts to profit from a change in the futures price. To do this, the speculator will take a long or short position in a futures contract depending upon his expectations of future price movement. A hedger, on-the-other-hand, desires to avoid price variation by locking in a purchase price of the underlying asset through a long position in a futures contract or a sales price through a short position. In effect, the hedger passes off the risk of price variation to the speculator who is better able, or at least more willing, to bear this risk.3. Why are most futures positions closed out through a reversing trade rather than held to delivery?Answer: In forward markets, approximately 90 percent of all contracts that are initially established result in the short making delivery to the long of the asset underlying the contract. This is natural because the terms of forward contracts are tailor-made between the long and short. By contrast,only about one percent of currency futures contracts result in delivery. While futures contracts are useful for speculation and hedging, their standardized delivery dates make them unlikely to correspond to the actual future dates when foreign exchange transactions will occur. Thus, they are generally closed out in a reversing trade. In fact, the commission that buyers and sellers pay to transact in the futures market is a single amount that covers the round-trip transactions of initiating and closing out the position.4. How can the FX futures market be used for price discovery?Answer: To the extent that FX forward prices are an unbiased predictor of future spot exchange rates, the market anticipates whether one currency will appreciate or depreciate versus another. Because FX futures contracts trade in an expiration cycle, different contracts expire at different periodic dates into the future. The pattern of the prices of these contracts provides information as to the market’s current belief about the relative future value of one currency versus another at the scheduled expiration dates of the contracts. One will generally see a steadily appreciating or depreciating pattern; however, it may be mixed at times. Thus, the futures market is useful for price discovery, i.e., obtaining the market’s forecast of the spot exchange rate at different future dates.5. What is the major difference in the obligation of one with a long position in a futures (or forward) contract in comparison to an options contract?Answer: A futures (or forward) contract is a vehicle for buying or selling a stated amount of foreign exchange at a stated price per unit at a specified time in the future. If the long holds the contract to the delivery date, he pays the effective contractual futures (or forward) price, regardless of whether it is an advantageous price in comparison to the spot price at the delivery date. By contrast, an option is a contract giving the long the right to buy or sell a given quantity of an asset at a specified price at some time in the future, but not enforcing any obligation on him if the spot price is more favorable than the exercise price. Because the option owner does not have to exercise the option if it is to his disadvantage, the option has a price, or premium, whereas no price is paid at inception to enter into a futures (or forward) contract.6. What is meant by the terminology that an option is in-, at-, or out-of-the-money?Answer: A call (put) option with S t > E (E > S t) is referred to as trading in-the-money. If S t≅ E the option is trading at-the-money. If S t< E (E < S t) the call (put) option is trading out-of-the-money.7. List the arguments (variables) of which an FX call or put option model price is a function. How does the call and put premium change with respect to a change in the arguments?Answer: Both call and put options are functions of only six variables: S t, E, r i, r$, T andσ. When all else remains the same, the price of a European FX call (put) option will increase:1. the larger (smaller) is S,2. the smaller (larger) is E,3. the smaller (larger) is r i,4. the larger (smaller) is r$,5. the larger (smaller) r$ is relative to r i, and6. the greater is σ.When r$ and r i are not too much different in size, a European FX call and put will increase in price when the option term-to-maturity increases. However, when r$ is very much larger than r i, a European FX call will increase in price, but the put premium will decrease, when the option term-to-maturity increases. The opposite is true when r i is very much greater than r$. For American FX options the analysis is less complicated. Since a longer term American option can be exercised on any date that a shorter term option can be exercised, or a some later date, it follows that the all else remaining the same, the longer term American option will sell at a price at least as large as the shorter term option.PROBLEMS1. Assume today’s settlement price on a CM E EUR futures contract is $1.3140/EUR. You havea short position in one contract. Your performance bond account currently has a balance of $1,700. The next three days’ settlement prices are $1.3126, $1.3133, and $1.3049. Calculate the changes in the performance bond account from daily marking-to-market and the balance of the performance bond account after the third day.Solution: $1,700 + [($1.3140 - $1.3126) + ($1.3126 - $1.3133)+ ($1.3133 - $1.3049)] x EUR125,000 = $2,837.50, where EUR125,000 is the contract size of one EUR contract.2. Do problem 1 again assuming you have a long position in the futures contract.Solution: $1,700 + [($1.3126 - $1.3140) + ($1.3133 - $1.3126) + ($1.3049 - $1.3133)] x EUR125,000 = $562.50, where EUR125,000 is the contract size of one EUR contract.With only $562.50 in your performance bond account, you would experience a margin call requesting that additional funds be added to your performance bond account to bring the balance back up to the initial performance bond level.3. Using the quotations in Exhibit 7.3, calculate the face value of the open interest in the September 2016 Swiss franc futures contract.Solution: 178 contracts x SF125,000 = SF22,250,000, where SF125,000 is the contract size of one SF contract. Note: By comparison the face value of the open interest in the 43,970 June 2016 contracts is SF5,496,250,000.4. Using the quotations in Exhibit 7.3, note that the September 2016 Mexican peso futures contract has a price of $0.05481 per MXN. You believe the spot price in September will be $0.06133 per MXN. What speculative position would you enter into to attempt to profit from your beliefs? Calculate your anticipated profits, assuming you take a position in three contracts. What is the size of your profit (loss) if the futures price is indeed an unbiased predictor of the future spot price and this price materializes?Solution: If you expect the Mexican peso to rise from $0.05481 to $0.06133 per MXN, you would take a long position in futures since the futures price of $0.05481 is less than your expected spot price.Your anticipated profit from a long position in three contracts is: 3 x ($0.06133 - $0.05481) x MXN500,000 = $9,780 where MXN500,000 is the contract size of one MXN contract.If the futures price is an unbiased predictor of the expected spot price, the expected spot price is the futures price of $0.05481 per MXN. If this spot price materializes, you will not have any profits or losses from your short position in three futures contracts: 3 x ($0.05481 - $0.05481) x MXN500,000 = 0.5. Do problem 4 again assuming you believe the September 2016 spot price will be $0.04829 per MXN.Solution: If you expect the Mexican peso to depreciate from $0.05481 to $0.04829 per MXN, you would take a short position in futures since the futures price of $0.05481 is greater than your expected spot price.Your anticipated profit from a short position in three contracts is: 3 x ($0.05481 - $0.04829) x MXN500,000 = $9,780, where MXN500,000 is the contract size of one MXN contract.If the futures price is an unbiased predictor of the future spot price and this price materializes, you will not profit or lose from your long futures position.6. Using the market data in Exhibit7.6, show the net terminal value of a long position in one 90 Sep Japanese yen European call contract at the following terminal spot prices (stated in U.S. cents per 100 yen): 81, 85, 90, 95, and 99. Ignore any time value of money effect.Solution: The net terminal value of one call contract is:[Max[S T– E, 0]– C e] x JPY1,000,000/100 ÷ 100¢, where JPY1,000,000 is the contract size of one JPY contract.At 81: [Max[81 – 90, 0] – 2.60] x JPY1,000,000/100 ÷ 100¢ = -$260At 85: [Max[85 – 90, 0] – 2.60] x JPY1,000,000/100 ÷ 100¢ = -$260At 90: [Max[90 – 90, 0] – 2.60] x JPY1,000,000/100 ÷ 100¢ = -$260At 95: [Max[95 – 90, 0] – 2.60] x JPY1,000,000/100 ÷ 100¢ = $240At 99: [Max [99 – 90, 0] – 2.60] x JPY1,000,000/100 ÷ 100¢ = $6407. Using the market data in Exhibit 7.6, show the net terminal value of a long position in one 90 Sep Japanese yen European put contract at the following terminal spot prices (stated in U.S. cents per 100 yen): 81, 85, 90, 95, and 99. Ignore any time value of money effect.Solution: The net terminal value of one put contract is:[Max[E –S T, 0] –P e x JPY1,000,000/100 ÷ 100¢, where JPY1,000,000 is the contract size of one JPY contract.At 81: [Max[90 – 81, 0] – 1.80] x JPY1,000,000/100 ÷ 100¢ = $720At 85: [Max[90 – 85, 0] – 1.80] x JPY1,000,000/100 ÷ 100¢ = $320At 90: [Max[90 – 90, 0] – 1.80] x JPY1,000,000/100 ÷ 100¢ = -$180At 95: [Max[90 – 95, 0] – 1.80] x JPY1,000,000/100 ÷ 100¢ = -$180At 99: [Max[90 – 99, 0] – 1.80] x JPY1,000,000/100 ÷ 100¢ = -$1808. Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an American call (put) option with a striking price of 93 is 2.10 (2.20) cents. Calculate the intrinsic value and the time value of the call and put options.Solution: Premium - Intrinsic Value = Time ValueCall: 2.10 - Max[92.04 – 93.00 = - .96, 0] = 2.10 cents per 100 yenPut: 2.20 - Max[93.00 – 92.04 = .96, 0] = 1.24 cents per 100 yen9. Assume spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum price that a six-month American call option with a striking price of $0.6800 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3 ½ percent.Solution:Note to Instructor: A complete solution to this problem relies on the boundary expressions presented in footnote 3 of the text of Chapter 7.C a≥Max[(70 - 68), (69.50 - 68)/(1.0175), 0]≥Max[ 2, 1.47, 0] = 2 cents10. Do problem 9 again assuming an American put option instead of a call option.Solution: P a≥Max[(68 - 70), (68 - 69.50)/(1.0175), 0]≥Max[ -2, -1.47, 0] = 0 cents11. Use the European option-pricing models developed in the chapter to value the call of problem 9 and the put of problem 10. Assume the annualized volatility of the Swiss franc is 14.2 percent. This problem can be solved using the FXOPM.xls spreadsheet.Solution:d1 = [ln(69.50/68) + .5(.142)2(.50)]/(.142)√.50 = .2675d2 = d1 - .142√.50 = .2765 - .1004 = .1671N(d1) = .6055N(d2) = .5664N(-d1) = .3945N(-d2) = .4336C e = [69.50(.6055) - 68(.5664)]e-(.035)(.50) = 3.51 centsP e = [68(.4336) - 69.50(.3945)]e-(.035)(.50) = 2.03 cents12. Use the binomial option-pricing model developed in the chapter to value the call of problem 9. The volatility of the Swiss franc is 14.2 percent.Solution: The spot rate at T will be either 77.39¢ = 70.00¢(1.1056) or 63.32¢ = 70.00¢(.9045), where u = e.142√.50 = 1.1056 and d = 1/u = .9045. At the exercise price of E = 68, the option will only be exercised at time T if the Swiss franc appreciates; its exercise value would be C uT= 9.39¢= 77.39¢- 68. If the Swiss franc depreciates it would not be rational to exercise the option; its value would be C dT = 0.The hedge ratio is h = (9.39 – 0)/(77.39 – 63.32) = .6674.Thus, the call premium is:C0 = Max{[69.50(.6674) – 68((77.39/68)(.6674 – 1) +1)]/(1.0175), 70 – 68}= Max[4.05, 2] = 4.05 cents per SF.MINI CASE: THE OPTIONS SPECULATORA speculator is considering the purchase of five three-month Japanese yen call options with a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The speculator believes the yen will appre ciate to $1.00 per 100 yen over the next three months. As the speculator’s assistant, you have been asked to prepare the following:1. Graph the call option cash flow schedule.2. Determine the speculator’s profit if the yen appreciates to $1.00/100 yen.3. Determine the speculator’s profit if the yen only appreciates to the forward rate.4. Determine the future spot price at which the speculator will only break even.Suggested Solution to the Options Speculator:1.-2. (5 x ¥1,000,000) x [(100 - 96) - 1.35]/10000 = $1,325.00.3. Since the option expires out-of-the-money, the speculator will let the option expire worthless. He will only lose the option premium.4. S T = E + C = 96 + 1.35 = 97.35 cents per 100 yen.。