Finance 433 Problems

Problem 1:
On June 30, you import/buy some equipment from a German manufacturer with delivery and 1,000,000

due Dec. 31. The current spot rate is as reported. How can you hedge your expected current payment

amount of :6” 1,000,000 if

a) You think the S will rise 15% against the Euro by Dec.

b) You think the S will fall 15% against the Euro by Dec.

Note: Use the current contract amounts for currency.

Problem 2:
Would you use a forward contract for solving Problem #1 ? if so, how would you do it ? If not, why not?

Problem 3:

You own a silver mine in Carson City, Nevada. You Sign to deliver 10 contracts of silver to the U. S. Mint in
Denver, Co. in 6 months. Unsure of whether the US. congress will throw the U. S. into default and trigger
another recession, you wish to protect your sale proceeds at the current spot price of silver.

a) How do you do this, assuming a middle man will charge you a nominal fee ofi$1,000 for his services
(Show calculations

b) Four months has gone by, and your mine has “played out” – – you can’t deliver on your contract. What
do you do now

Problem 4:

On June 30, Andrusco Corp. sold a nuclear car to a Kuwaiti Sheik for 2,000,000 dinar, payable upon delivery

of the car on 12/31. Andrusco wants to protect his transaction with a money market hedge.

a) Assuming current exchange rates; interest rates in Kuwait are Kuwaiti Prime plus 3; the interest rate
in the U . S. is Prime; and Kuwaiti bank loans are discounted. Show how Andrusco would use a money
market hedge in this situation to benefit his company.

b) How would you advise Andrusco to make sure that the payable on Dec. 31 is guaranteed ? Assume
that an insurance co. would charge a premium of 2% (payable quarterly) of the outstanding balance of
their investment.

CAUTiON: Remember that interest rates are quoted annually. Use simple interest calculations.

Problem 5:

You think the price of Toyota stock will fall from the current quote of 55 9/16 to 39 3/7 over the next few
months. Wishing to make the most money you can, you buy an option at a premium of 10%; however,
you want to protect yourself just in case you’re wrong about the direction of the market.

a) Which option do you buy to maiimize your return ? V
b) What will be your return if your estimate comes true
c) What would happen to your investment if, instead of falling , Toyota rises to 76 2/17