Q4.
(a) Mr. Shanku has borrowed dollars in the U.S., but is now concerned about its currency risk. What alternatives does he have to limit his risk? Be specific in your recommendation.
(b) Mr. Shanku wonders whether it is reasonable to expect real rates of interest to be identical across countries. He is curious to know what this implies about parity. Explain your answer(s) clearly to Mr.Shanku.
Solution Preview
a. To reduce foreign exchange risk. Mr. Shanku could use forward contracts, options, or futures contract. Forward contracts are agreements between two parties to fix the exchange rate between them. A currency futures contract is also an agreement between two parties to buy or sell a particular currency at a future date, at a fixed rate. It differs from a forward contract in that these contracts are much more liquid, and in fact are bought and sold ...
... in euro currency markets to minimize risks present in ... and corporations that have the risk of defaulting ... Euro currency markets also ensure that liquidity risk...
... rates are lower, there is an increased incentive to borrow money. ... Changes in how much money is available and how ...Risk is considered based upon these factors. ...
... of the following is not an international risk consideration: ... d. Cross-cultural risks. ... change will change the value of foreign currency denominated transactions ...
...currency bank accounts and transfer funds to these accounts ... While this will mitigate the risks inherent in ... not mitigate foreign exchange risk if the exchange ...
... This helps in reducing the financial risk and improving the solvency of the ... Debt represents borrowed amount of the firm. ... Evaluation of raising money from debt. ...
... Thus a company can borrow a mix of currencies local as well ... 3. It also helps in hedging against the risk of its liabilities if it creates assets in those ...
... Nike's capital structure allows for additional debt without significant risks. ... only use a pert of the money to purchase ... is so as to reduce the risk of losing ...
... facilitates this through imposing interest rates on the borrowed funds. ... with a means of insurance for the risks. ... to hedge against fluctuations of money at the ...
... If the currencies are highly correlated, they move together and increase the risk. 14. A US firm plans to borrow Swiss francs today for a one-year period. ...
... rate, parity condition and country risk d. interest rate, currency rate, devaluation e ... to avoid expropriation except: a. borrow locally divestiture ...
