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krok68 [10]
3 years ago
14

4. Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20 million which is pay

able in one year. The current spot exchange rate is $1.05/€ and the one-year forward rate is $1.10/€. The annual interest rate is 6.0% in the U.S. and 5.0% in France.
Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.

(a) It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Credit Lyonnaise against the euro receivable. Which alternative would you recommend? Why?

(b) Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?
Business
1 answer:
sergey [27]3 years ago
3 0

Answer:

a) a forward hedge is better

b) a forward rate of 1.06 will make both method equal

Explanation:

Solution:  (a)

<u><em>forward hedge:</em></u>

20,000,000 x 1.10 = $<em>22,000,000</em>

<u><em>money market hedge:</em></u>

PV of Air France payment:

€20,000,000/1.05  = €19,047,619

In dollars at spot rate

€19,047,619 x $1.05/€ = $20,000,000

Then we invest at 6% risk-free:

$20,000,000(1.06) = <em>$21,200,000</em>

(b)

Forward rate:

Spot exchange-rate x US rate/Foreing rate =

1.05 x 1.06 / 1.05 = <em>1.06</em>

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wlad13 [49]

Answer:<em> Negative externality is defined as the cost that is incurred by a individual who isn't involved in the economic transaction.</em>

In the above question, the following is the example of negative externality: <u><em>smoking harms the health of nonsmokers who are nearby.</em></u>

Here, the cost is incurred by the nonsmokers who are standing nearby individuals who prefer smoking. Thus creating negative externality.

<u><em>Therefore, the correct option is (c)</em></u>

7 0
3 years ago
A corporate CEO wished to relay good news about the prospect of a new technology being created, but was reluctant to do so. Inst
borishaifa [10]

Answer:

Information signaling

Explanation:

Information signalling is defined as the various actions a firm takes that communicates it's financial outlook. For example if a firm releases a dividend policy it communicates the value of the firm's stock.

In this scenario the CEO announced increase in the firm's dividend. This will convey to investors that the company has a competitive advantage which will result in additional income, so dividends are being raised.

It is an indirect way of announcing good news about the prospect of a new technology being created.

7 0
3 years ago
Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound opti
scoray [572]

Answer:

The highest net loss of $1,562.50 (i.e. – $1,562.50)

Explanation:

This can be calculated using the following equation:

Highest net profit possible = British pounds put option price per unit × Units of the pound option

                                                = $0.05 x 31,250

Highest net profit possible = $1,562.50

However, based on the information provided in the question, the option will not be exercised and this will result into the highest net loss of $1,562.50 (i.e. – $1,562.50).

7 0
3 years ago
When a company strives to achieve lower overall costs than rivals and appeals to a broad spectrum of customers, it pursues Multi
dybincka [34]

Answer:

an overall low-cost provider strategy.

Explanation:

Competitive advantage can be defined as conditions, factors or circumstances that allow a business firm (organization) to manufacture finished goods or services better and perhaps cheaper than other (rival) firms in the same industry. Thus, it's responsible for putting a business firm in a superior or more favorable position than rival firms.

This ultimately implies that, a competitive advantage has a significant impact on a business because it increases its level of sales, revenue generation and profit margin when compared to rival firms in the same industry.

A overall low-cost provider strategy is a strategic business model that's typically focused on a broad customer base (segment) while still making profit by providing low-cost goods and services to the customers, as well as underpricing rivals in the same industry.

This ultimately implies that, it is a business strategy that involves lowering the price of goods and services in order to stimulate demand, generate more revenue, draw more customers and gain a competitive advantage over competitors or rivals in the same industry.

Hence, when a company strives to achieve lower overall costs than its rivals in the same industry and appeals to a broad spectrum of customers, it is considered to pursue an overall low-cost provider strategy.

6 0
3 years ago
Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at
Digiron [165]

Answer: 0.9

Explanation:

The Expected Return on an investment can be calculated using the Dividend Discount Model as it is a key component in thw formula which is,

P = D1 / r - g

where,

D1 is the dividend paid next year

P is the current stock price

g is the growth rate

r is the expected return

With the given figures we have,

84 = 4.20 / r - 0.08

84 ( r - 0.08) = 4.20

r - 0.08 = 4.20/84

r = 4.20/84 + 0.08

r = 0.13

The Expected Return can be slotted into the CAPM formula to find the beta.

The CAPM formula calculates the Expected Return in the following manner,

Er = Rf + b( Rm - rF)

Where,

Er is expected return

Rf is the risk free rate

Rm is the market return

b is beta

Slotting in the figures gives,

0.13 = 0.04 + b( 0.14 - 0.04)

0.13 = 0.04 + b (0.1)

0.13 - 0.04 = 0.1b

b = 0.09/0.1

b = 0.9

Using the constant-growth DDM and the CAPM, the beta of the stock is 0.9

8 0
3 years ago
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