forward hedge and a money-market hedge. The learning objectives of the case are as follows: • To explore the magnitude and effect of exchange-rate risks. • To illustrate exchange-rate risk management through two conventional hedges—a forward-contract hedge and a money-market hedge. • To demonstrate market parity and identify how preferences arise from unique company characteristics. • To explore issues related to pricing of international bids. Hedging Before exploring the two hedges‚ it
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DERIVATIVES FOR MANAGING FINANCIAL RISK Q-1 What are derivatives? Why do companies hedge risk using derivatives? A-1 A derivative is a financial instrument whose pay-offs is derived from some other asset which is called an underlying asset. Option‚ an example of a derivative security‚ is a more complicated derivative. There are a large number of simple derivatives like futures or forward contracts or swaps. Derivatives are tools to reduce a firm’s risk exposure. A firm can do away with unnecessary
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financial position and measure those instruments at fair value. If certain conditions are met‚ a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment‚ (b) a hedge of the exposure to variable cash flows of a forecasted transaction‚ or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation‚ an unrecognized firm commitment‚ an available-for-sale security‚
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maturity‚ which is true? a. Call‚ payoff 10‚000P b. Put‚ loss 10‚000R c. Call‚ profit 30‚000R d. Call‚ loss 30‚000R e. None of the above 4. Suppose that you will be receiving $1‚000‚000 on Feb 2 (about two months). Which option should you use to hedge its value in Brazilian Real‚ and what will your effective exchange rate be if on Feb 2‚ the spot 2.35 R/$. Forward is 2.2R/$. a. Call‚ 1.95 b. Put‚ 2.55 c. Call‚ 2.60 d. Put‚ 2.35 e. Put‚ 2.15 5. Assuming a forward rate of 2.2‚ at what realized
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case that the cost per USD is CAD 0.90; the parity case that the cost per USD is CAD 1.00; and the pessimistic case that the cost per USD is CAD 1.10. See attached. 3. What is the total CAD cost at the end of January of the required USD if Pionix hedges forward? (A sentence or two. Show details in an exhibit.) See attached. 4. Show how the total CAD cost at the end of January of hedging with an option varies under the three scenarios. (The total cost includes what you pay for the USD and what
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order to hedge its exposure? 8. Financial liabilities- Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure? 9. Why do some financial institutions remain exposed to interest rate risk‚ even when they believe that the use of interest rate futures could reduce their exposure? 10. Explain the difference between a long hedge and a short hedge used by financial
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What is GM’s foreign exchange hedging policy? GM’s foreign exchange hedging policy has three primary objectives. Its first objective is to reduce cash flow and earnings volatility. Specifically‚ management hedges the company’s transaction exposures and consciously ignores any balance sheet exposures (translation exposures). Second‚ GM aims to minimize the management time and costs dedicated to global FX management. The company employs a passive FX management strategy since an internal study
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Accounting for Derivative Instruments Page 1 of 22 Appendix 17A Accounting for Derivative Instruments Until the early 1970s‚ most financial managers worked in a cozy‚ if unthrilling‚ world. Since then‚ constant change caused by volatile markets‚ new technology‚ and deregulation has increased the risks to businesses. In response‚ the financial community developed products to manage these risks. These products—called derivative financial instruments or simply‚ derivatives—are useful for managing
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MNCs will normally compare the cash flows that could be expected from each hedging technique before determining which technique to apply. A futures hedge involves the use of currency futures. To hedge future payables‚ the firm may purchase a currency futures contract for the currency that it will be required. A forward hedge differs from a futures hedge in that forward contracts are used instead of futures contract to lock in the future exchange rate at which the firm will buy or sell a currency .An
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Investment report of Westpac Banking Corp. & Commonwealth Bank of Australia Table of Contents Executive Summary………………………………………………….……………...1 Introduction…………………………………………………………………………...2 Overview of the Current Financial Market……………………………………......2 Ratio Analysis………………………………………………………………………. 3 Return Measurement: Percentage Return……………………………...……...3 Risk Measurement: Reward-to-Risk…………………………………..……..…4 Market Value Measurement: P/EPS………………………………...…...……..5 Profitability
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