Fin-516 – Week 7 – Homework Problems - Chapter 17

FIN-516 – WEEK 7 – HOMEWORK PROBLEMS - CHAPTER 17

No. 1 - Exchange rates

If one U.S. dollar buys 1.64 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?

$1/1.64 = $.61

No. 2 - Currency Appreciation

Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?

144*1.08 = 155.52

No. 3 - Eurobonds versus domestic bonds

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

9/1-.28 = 12.5

No. 4 – Credit & Exchange Rate Risk

Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S. dollars?

143.5/154.4 = .9294 million dollars

No. 5 – Forward Market Hedge

Suppose a U.S. firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against...