Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

Answers to Chapter 19 Questions.........................................................

1. Transaction exposure is the impact on current transactions, such as accounts receivable and
   accounts payable in a foreign country when the exchange rate changes. Economic exposure
   is fluctuating exchange rates affect expected cash flows over time. Translation exposure is
   the change in a company's consolidated financial statements because accountants use
   different exchange rates to convert accounts into the domestic currency. Finally, changes in
   exchange rates influence a firm's cash flows, revenues, and costs, and thus, it affects a
   company's taxes.


2. This is not a good situation because you earn revenue from sales in pesos while you pay
   costs in dollars. Thus, the transaction exposure is your costs rise while your revenues fall.
   Economic exposure is the impact of an appreciating U.S. dollar on your business over time,
   and in this case, you would expect your profits to fall over time.


3. You calculated your gain from this transaction below:

ݐ݂݅݋ݎ݌=$1 ݊݋݈݈݅݅݉ቀ

ଵ €

.ଶହቁ−^500 ,^000 €=^300 ,^000 €^

A fluctuating exchange only impacts the revenue while your hotel's costs remain constant.
Thus, your profit would fluctuate between 180,000 and 420,000 euros, computed below:

݁ݎݑݏ݋݌ݔ݁=$1 ݊݋݈݈݅݅݉( 1 ± 0. 15 )ቀ

ଵ €

.ଶହቁ−^500 ,^000 €=

[ 180 , 000 €, 420 , 000 €]

4. First, the company has an exchange rate risk. If the exchange rate does not change, then the
   company receives $4.5 million.

Second, the company eliminates the exchange rate risk and pays $5 million.

Third, the company borrows 4 ,938,271.60 CD today, and it would transfer $ 4 ,444,444.44
today using the spot exchange rate.

Fourth, the company receives $ 4 , 365 , 000 today.

5. First, the company has an exchange rate risk. If the exchange rate does not change, then the
   company receives $45,454.54.

Second, the company eliminated the exchange rate risk, and it will pay $ 4 1,666.67.

Third, the company needs 495,458.30 pesos to deposit today, and it would transfer
$45,041.66 today using the spot exchange rate.

Fourth, premium equals 576.92 while the company is guaranteed a minimum of $38,461.54.