Purchase Solution

Determining Value and Expected Profit

Not what you're looking for?

Ask Custom Question

Question: Raytheon exported a Patriot missile defense system to Germany. The system costs EUR 500,000,000, and the German government will be making the payment in one year. The current EUR/USD spot rate and money market interest rates are listed below:

Spot: EUR/USD is 1.3176/77
(read as $1.3176-1.3177 per Euro)

RUSD=2%-2.5%
REUR=3%-3.5%

Raytheon wants to sell its receivables forward. Raytheon's principle commercial bank Citi quotes the following 1-year forward rate: $1.2985-1.3113

Show how the Citi bankers calculated the forward rate for the Raytheon transaction. Would Raytheon trade at 1.2985 (bid rate) or 1.3113 (offer rate)?

Assuming that Raytheon decides to sell EUR 500m forward, what would be the dollar receipts if the spot rate one year from now is EUR/USD 1.3400? What would be the dollar receipts if the spot rate is EUR/USD 1.2200?
Discuss pros and cons of hedging Euro risk for Raytheon.

Question 1: Amber McClain, the currency speculator sells 8 June futures contracts for 500,000 pesos at the closing price of $0.10773/Ps?
a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?
b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?
c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?

Question 2: A U.S. importer that incurs costs in GBP and bills its customers in USD is concerned about the depreciation of USD against GBP due to GBP payables of £10,000,000 in a month. To hedge (protect) the position, the importer decides to use futures markets. Currently GBP contracts (62,500 GBP each) are traded at 1.5290. Spot rate is 1.5310 (i.e., GBP/USD 1.5310). Suppose the importer takes an equal futures position to its cash market position (GBP 10m) at 1.5290. Assume that the futures contract price and spot rates are 1.5995 and 1.6020, respectively, when the hedge is liquidated. What should the unit cost of GBP be for the importer in terms of USD?

Question 3: Christoph Hoffeman of Blade Capital now believes the Swiss franc will appreciate versus the U.S. dollar in the coming three-month period. He has $100,000 to invest. The current spot rate is $0.5820/SF, the three-month forward rate is $0.5640/SF, and he expects the spot rates to reach $0.6250/SF in three months.
a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy.
b. Calculate Christoph's expected profit assuming he buys or sells SF three months forward.

Purchase this Solution
Solution Summary

The value and expected profits are determined. The German government which will make payment in one year are analyzed. Calculations are provided for the value of the position at maturity if the ending spot rate is given.

Solution Preview

See the attached file. Hope this will help. Thanks

Question
Raytheon exported a Patriot missile defense system to Germany. The system costs EUR 500,000,000, and the German government will be making the payment in one year. The current EUR/USD spot rate and money market interest rates are listed below:
Spot: EUR/USD is 1.3176/77

(read as $1.3176-1.3177 per Euro)

RUSD=2%-2.5%

REUR=3%-3.5%

Raytheon wants to sell its receivables forward. Raytheon's principle commercial bank Citi quotes the following 1-year forward rate:

$1.2985-1.3113

Show how the Citi bankers calculated the forward rate for the Raytheon transaction. Would Raytheon trade at 1.2985 (bid rate) or 1.3113 (offer rate)?
Forward rate (Bid) = Spot Rate (Bid) *(1+RUSD(bid))/(1+REUR(ask))= 1.3176*(1+2%)/(1+3.5%)
=1.3113

Forward rate (ask) = Spot Rate (ask) *(1+RUSD(ask))/(1+REUR(bid))= 1.3177*(1+2.5%)/(1+3%)
=1.2985
Assuming that Raytheon decides to sell EUR 500m forward, what would be the dollar receipts if the spot rate one year from now is EUR/USD 1.3400? What would be the dollar receipts if the spot rate is EUR/USD 1.2200?
For selling Raytheon will receive the bank's bid rate i.e $1.2985, the dollar receipt ...

Purchase this Solution
Free BrainMass Quizzes
Motivation

This tests some key elements of major motivation theories.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Operations Management

This quiz tests a student's knowledge about Operations Management

View More Free Quizzes
Related BrainMass Solutions

  • Expected Market Price & Profits

    d(Profit)dQ = 140 - 1 - 4Q Setting it to 0 we have 4Q = 139 Q = 34.75 Units What are your expected profits? To calculate expected profits, we put the value of Q in total profit function.

  • Statistics: Determining EMV & EOL for vendor at baseball stadium

    D To choose an investment: You want a high EMV, low EOL, and high RRR. The solution computes expected monetary value, expected opportunity loss, and return to risk ratio.

  • Costs, Price, and Profit

    560979 Costs, Price, and Profit Discuss the distinctions between costs, price, and profit.

  • General multiple choice economics questions

    c. a lower expected value.

  • Does the difficulty in determining the current value of an a

    If the bonds are not a part of the main operating activity of the non-profit, the bonds are taxable and reported the same for the for-profit and non-profit entities.

  • Magid Corporation: Securities Valuation

    304698 Magid Corporation: Securities Valuation The book is: Aswath Damodaran, Investment Valuation, Tools and Techniques for Determining the Value of Any Asset, Second University Edition, John Wiley & Sons, 2002 [ISBN 0-471-4190-5 (paper)] 1.

  • Determining the Lower of Inventory Cost or Market Value

    Replacement                 Estimated                  Expected              Normal Profit Product               Original Cost                  Cost                          Disposal Cost             Selling Price            on Sales     

  • Finance:Future value,present value,portfolio returns etc.

    determining the asset's expected cash flows choosing a discount rate that reflects the asset's risk calculating the present value determining whether the project is mutually exclusive or not 24.

  • Economics: Determining the Output Level

    Compute the expected profit, variance, standard deviation, and coefficient of variation for each level of output: Output E (?) ? 2 ? ?

  • 10 Finance Questions

    The expected rate of return on the stock of Skilled Healthcare Group, a for-profit company that operates a large number of nursing homes and assisted living centers e.

View More Related Solutions