Tag: USD

Suppose that a computer glitch causes you to lose all the observations for which . Will ordinary least squares (OLS) still provide an unbiased estimator of if you estimate Model 1 using the remaining data? Explain.

Q1 Sample Selection8 Points
Model 1: , with
Where denotes household ‘s average annual
consumption and denotes a measure of household ‘s
permanent income (both measured in thousands of USD). Suppose
that your sample consists of a random sample of consumption and
income data from the entire population of U.S. households, which is
your population of interest.

Q1.1
2 Points
Suppose that a computer glitch causes you to lose all the observations
for which . Will ordinary least squares (OLS) still
provide an unbiased estimator of if you estimate Model 1 using the
remaining data? Explain.

How would ROE equity change if the company were to employ more financial leverage. Is this always wise? What else do you expect would change if the company increase its ROE?What would be a disadvantage if sales were denominated in USD, but costs were denominated in Japanese Yen?

1) Create a sensitivity analysis, a scenario analysis or a Monte Carlo Simulation for the capital budgeting project. Plot the results. What do you notice?

2) Is wealth being generated by the company with this project over a period of 5 years (Hint: calculate the NPV using equal cash flows for years 1 – 4 (same sales and costs for 4 years) and adjusting the final cash flow with the change in NOWC)?

3)How would you improve the outcome, looking at either scenario analysis or sensitivity analysis (Hint: changing the most sensitive driver only a little bit will still have a big impact).

4) How does changing the weighted average cost of capital influence results? Does the company have any control over its WACC?

5) Create a forecast based on the current income statement under the assumption, that next years sales will change, that management is able to reduce fixed costs and that the company is able to reduce its asset base. What would be the effect on its ROE?

6) How would ROE equity change if the company were to employ more financial leverage. Is this always wise? What else do you expect would change if the company increase its ROE?

Cash Budget
7) Create an intra-year cash budget with the information above. Does the company need to borrow funds throughout the year? What happens to the cash budget if the company decreases its DSO, e.g. improve its cash collection proces?

8) Solely looking at the cash budget, does the company have enough cash in your opinion to pay a dividend in July?  briefly explain your answer.

General Questions
9) What could the company do to reduce variability in results (Hint: for example, think about operational leverage)?

10) What would be a disadvantage if sales were denominated in USD, but costs were denominated in Japanese Yen?

Narnia has introduced a withholding tax of 15% on dividends (though not on interest payments). How would this change the optimum funding?

Quiz

1. Calculate the following cross rates

a. The 8/F rate given 1.3874 $/€ and 110 F/$ b. The CHF/€ rate given 1.3874 $/8 and 0.9148 CHF/$ c. The €/f rate given 1.3874 $/€ and 1.1807 $/€ d. The AUD/CHF rate given 0.9151 CHF/$ and 1.3620 AUD/$

2. Given Forward Rate is CHF1.50/USD, iusn = 4.2%, icHF=0.4%, estimate the spot price today.

3. Suppose that the one-year interest rate is 3% in the United States, the spot exchange rate is $1.18/€, and the one-year forward exchange rate is $1.14/€. What should the one-year interest rate be in the euro zone?

4. Following quotations are available to you: (You may buy or sell at the stated rates.) Assume that you have an initial DEM 1 000 000 available. Is triangular arbitrage possible? If so, explain the steps and compute the profit. Lehman Brothers: 4.8600FRF/GRD Bear Stearns: 1.4200 DEM/GRD Bank of Scotland: 3.4400 FRF/DEM

5. The corporate tax rate for a company head office is 27%. The corporate tax rate for a subsidiary in Narnia is 20%. Narnia has a thin-cap. regulation that requires at least a third of funding for the subsidiary comes from equity. How would you fund the subsidiary from head-office?

6. Narnia has introduced a withholding tax of 15% on dividends (though not on interest payments). How would this change the optimum funding?

7. What contribution would be made to head office post-tax profit in question 6?

What have you learned about the different hedging methods? Compare MM hedge and forward hedge. Compare forward hedge and futures hedge. Compare options and futures. Which is easier to use? Which is riskier?

Home work
Basic information for this currency pair USD/CAD

1. Determine the percentage change in the currency’s value over the period studied

2. Assume that on the day of DC1, you had contracted to purchase imports, which would require you to pay 1 million units of the currency on the day of DC2.

a. If you had hedged your position with a forward hedge, how many dollars would you have paid for the goods as of the end of the period?

b. If you had hedged your position with a futures hedge, how many dollars would you have paid for the goods as of the end of the school term?

c. If you had hedged your position with a call option hedge, how many dollars would you have paid for the payables as of the end of the period?

d. Assume that you used a money market hedge at the beginning of the school term by borrowing USD at the LIBOR rate + 2%, converted into the foreign currency and invested at the LIBOR rate for the foreign currency to obtain enough money to pay for the account payable.

How many dollars would you have to pay on the loan at the end of the school term?

e. If you did not hedge, how many dollars would you have paid for the goods as of the end of the school term?

f. Fill out the table below
Strategy used for payables Unit cost Total dollar amount paid before commissions Total cost after considering CME fees

3. This question connects with the forecast obtained in Fxstreet
Assume that the hedging decision depended on the forecast of the currency from FX street. If ALL analysts suggest that foreign currency is going up, then you want to hedge 100% of the payables. If ALL analysts suggest that foreign currency is going down, then you will play it conservatively and only hedge 25% of the exposure. You can choose to hedge a fraction of the amount based on the number (%) of analysts expecting an increase. Select the level and calculate the profit/loss for each hedging technique compared to the unhedged position (no hedge case).

Which alternative was best in this case? Was your forecast useful?
The best alternative is call option hedge OTM

4. Assume that as of the beginning of the school term, you had contracted to sell exports, which would result in your receiving 1 million units of the foreign currency at the end of the school term.

a. If you had hedged your position with a forward hedge, how many dollars would you have received for the goods as of the end of the school term?

b. If you had hedged your position with a futures hedge, how many dollars would you have received for the goods as of the end of the school term?

c. If you had hedged your position with put options, how many dollars would you have received for the goods as of the end of the school term (account for the premium that you paid for the put option)?

d. Assume that you used a money market hedge at the beginning of the school term by borrowing foreign currency at the LIBOR rate + 3%, converted into USD and invested in the business at an annual rate of 8%. How many dollars would you “receive” at the end of the school term?

e. If you did not hedge, how many dollars would you have received for the goods as of the end of the school term?
Final spot Total revenue

f. Fill out the table below
Strategy used for receivables Unit price Total dollar amount received

“5. This question also connects with the FXstreet forecasts and the hedging decision depends on the number of analysts projecting an adverse movement.
Which alternative was best in this case? Was your forecast useful?
The forward hedge provides the highest benefit for the investor.

6. What have you learned about the different hedging methods? Compare MM hedge and forward hedge. Compare forward hedge and futures hedge. Compare options and futures. Which is easier to use? Which is riskier? Which has a higher initial cost?

The two alternatives provides advantages and disadvantages to investor. The use of options provides the alternative to execute or not the derivative according to the conditions of the market until maturity, different to future, which depends on the spread between the future value and current value