International Finance Essay

1171 words - 5 pages

Dozier Hedging Alternatives

Forward Market Hedge:

Dozier would purchase U.S. dollars under a forward contract. The contract would obligate Dozier to pay £1,057,500 in exchange for

£1,057,500 x 1.4198 $/£ = $1,501,438.50

assuming the transaction was at the quoted 3-month forward rate in Exhibit 4.

Relative to the value of the contract at the current exchange rate,

£1,057,500 x 1.4370 $/£ = $1,519,627.50

Dozier would accepting a reduction in the revenue from the contract of

$1,519,627.50 - $1,501,438.50 = $18,198.00 or

$18,198 / $1,519,627.50 = 1.20%

Money Market Hedge:

In this case, Dozier would borrow an amount of British pounds that would obligate ...view middle of the document...

50

Dozier would accepting a reduction in the revenue from the contract of

$1,519,627.50 - $1,493,995.23 = $25,632.27 or

$25,632.27 / $1,519,627.50 = 1.69%

That is a bigger reduction in the value of the contract than the forward market hedge. So if that is Dozier's use of funds, the company would be better off using the forward market.

On the other hand, they were borrowing under a credit line at the end of the year at an interest rate of 10.5% (prime + 1%). If they avoid borrowing at least as much as the UK borrowing would provide over the next three months, the company might be better off with the UK loan than it would with the forward rate contract. Here the choice also depends on whether they can actually borrow at a fixed rate of interest for three months and other considerations including accounting issues.

We could calculate a “breakeven” interest rate—the average USD rate that must apply to the dollars received from UK borrowing for Dozier to be indifferent between the two hedging methods.

$1,464,701.21 x (1 + i) = $1,501,438.50

(1 + i) = $1,501,438.50/$1,464,701.21 = 1.02508

which is an annual rate of 10.03%. If having cash in the US is worth more than 10%, UK borrowing would be a better hedging method.

Shortcut Formulas

It's a bit of a pain to do these calculations. Fortunately there is a shortcut. First, for the forward hedge, the following formula can be used:

Cost of forward hedge = (Forward – Spot) / Spot

= (1.4198 – 1.4370) / 1.4370

= –0.0120 or –1.20 %

The negative number shows that it is a "cost". If the result is positive, you are "benefiting" from the hedge relative to the value of the contract at current spot exchange rate.

For the money market hedge, the shortcut formula is:

Cost of MM hedge = ($ interest rate – £ interest rate) / (1. + £ interest rate)

= (0.02 – 0.0375) / (1.0375)

= –0.0169 or – 1.69%

If you want to assure yourself that the formulas are correct, set up the calculations we did before algebraically and see how the currency numbers cancel out.

The main problem with these formulas is keeping track of which interest rate goes where. There is a handy rule for this. Take the exchange rate quote that you are using, here $/£. Think of this in general...

Other assignments on International Finance

International Finance Management Answer 1 Essay

667 words - 3 pages FINC3011 Tutorial 1 B&H Chapter 2 Questions 1, 2, 3, 4, 5, 6 & 9 1. What is an exchange rate? Answer: An exchange rate is the relative price of two currencies, like the U.S. dollar price of the euro, the Thai baht price of the Malaysian ringgit, or the Mexican peso price of the Canadian dollar. 2. What is the structure of the foreign exchange market? Is it like the New York Stock Exchange? Answer: The interbank foreign exchange market is a

International Trade And Finance Speech Eco 372

1402 words - 6 pages Efficiency and Collaboration Proposal BIS/220 October 19, 2011 Efficiency and Collaboration Proposal Party Plates has grown significantly within the last two years and the current Excel system, excel, cannot keep up with all data. In order to improve the efficiency of the current information systems used in Party Plates, the antiquated system needs to be upgraded to a much more efficient system such as Microsoft Access. The

Imba

797 words - 4 pages A B. Finance Specialization Requirements (12 semester hours): Term Two (spring) | | | IMB 531 Portfolio Analysis and Management I: Equity | (2) | | IMB 532 Portfolio Analysis and Management II: Fixed Income | (2) | | IMB 533 Portfolio Analysis and Management III: Derivatives and Financial Risk Management | (2) | | IMB 536 Global Macroeconomic Trends and Financial Institutions or CSB Elective | (1) | | IMB 534 International

Justification Report

506 words - 3 pages To Mr.Wang According to my research to current economic journals in market, I recommend ‘American Economic Review’ as the magazine our company should order for employers to read. We are a public company; our employers should not only focus on their own work, but also have some knowledge of economic or finance to assist CEO to make right decisions for company, and enhance their comprehensive working ability. I have chosen three journals to

Bus3062

690 words - 3 pages companies; International finance—involves investors, companies, business operations, and capital markets that may be located in different companies(Cornett, Adair, & Nofsinger, 2014,). 2. What are the three basic forms of business ownership? What are the advantages and disadvantages to each" (Cornett, Adair, & Nofsinger, 2014, p. 21)? Partnership is an organizational form that has multiple individual owners. Each partner can own a

Case Study

347 words - 2 pages account transactions. While the World Bank’s role was to finance post war reconstruction in devastated economies and thereby to promote long term economic stability. There are powers that should be granted to these international institutions. First is the voting power at both IMF & the World Bank. Another is dollar as a centerpiece of the new international exchange rate mechanism. And lastly, these are the one who will give basis on what domestic

International Political Economy

285 words - 2 pages significant work examining the results of trade deals), development, the relationship between democracy and markets, international finance, global markets, multi-state cooperation in solving trans-border economic problems, and the structural balance of power between and among states and institutions. Unlike conventional international relations, power is understood to be both economic and political, which are interrelated in a complex manner. IPE emerged as a heterodox approach to international studies during the 1970s as the 1973 world oil crisis and the breakdown of the Bretton Woods system alerted academics, particularly in the U.S., of the...

Public Finana

2612 words - 11 pages Public finance is sometimes synonymous with government finance. It deals with budgeting the revenues and expenditures of a public sector entity, usually government. Public finance also can be defined as the raising of money by governments through taxes or borrowing and the spending of it. In Japan, the national budget and other basic matters on public finance are governed by the Public Finance Law, 1947 (Law No. 34, Apr. 31, 1947), which has

Banking

1394 words - 6 pages FRBM ECS EDMU EEA EEC EEFC FRN FSS FWG x Manual on Financial and Banking Statistics Abbreviations GDP GDR GFD GFS GIC GLS GNIE Gross Domestic Product Global Depository Receipt Gross Fiscal Deficit IFC IFC(W) IFCI International Finance Corporation International Finance Corporation (Washington) Industrial Finance Corporation of India Investment Fluctuation Reserve Account International Financial Statistics Iterative

Mr Praveen

862 words - 4 pages international business will be an integral part of my job as an entrepreneur, it is essential that I fill in these gaps. The NAME School's MBA program is the perfect bridge from where I am to where I want to be. I am attracted by the inventiveness and uniqueness of its entrepreneurial and finance programs, and believe that I will increase my practical knowledge of entrepreneurship by interacting with my classmates. I value the fact that at NAME

Rfdytc

536 words - 3 pages , and the importance of trust. Environmental Perspective - Speakers are selected to provide a historical perspective of NASA’s evolution and to illuminate key business environments such as Congress and the international and commercial space sectors. Finance - With the implementation of full cost accounting, NASA is changing its internal financial practices to become more like industry. In a four-hour session, attendees are given a summary course on

Similar Documents

International Finance Essay

876 words - 4 pages International Finance May 10, 2015 U.S International Debt Please look at the International part of the U.S. Government debt and discuss, 1) why the country has had to rely on International lenders, 2) why the situation with the International lenders may have caused the U.S. Federal Reserve System to initiate Quantitative Easing, and 3) give your opinion of the possible future state of the U.S. economy as it relies on International lenders

International Finance Essay

625 words - 3 pages decrease exchange rate volatility. Thus, they intervene because changes in the exchange rates that occur can affect the health of their markets and financial systems as well as inflation and economic growth, and they of course don't want that. 4. What is fundamental analysis in macroeconomics, not finance? Fundamental analysis (in macroeconomics) looks to measure the value of an investment by examining related economic factors. These factors include rate of inflation, interest rates, GDP rate, and unemployment level. Fundamental analysts assess the overall conditions of an economy to understand any and all factors that may affect the value of an investment. 

International Finance Essay

5524 words - 23 pages ) or a Transnational Company (TNC) or International Business (INB). Multinational Companies (MNCs) are defined as firms that engage in some form of international business. Their managers conduct international financial management, which involves international investing & financing decisions that are intended to maximize the value of MNC.” An enterprise operating in several countries but managed from one (home) country is called a

International Trade And Finance Speach Essay

357 words - 2 pages Exports: Chrysler, Ford and GM are the top automotive manufacturers in America. When the top three automobile manufacturers began to see a decline in their sales, shortly afterwards it lead to a trade deficit and soon after that a drop in employment (Thompson, 2010). When America cannot sell goods to other countries this causes a surplus of domestic goods. In the case of automobiles if there is a surplus there production will slow and