finance people..need your help..mba question

4x4TX · February 24, 2003

have two questions from my homework due wed that I need help on...anyone with experience in this? Any help appreciated....if not anyone know of a webboard for these types of questions??

Assume the interest rates in New Zealand and U.S. are 6.5% and 5% respectively. If you forecast the exchange rate for New Zealand dollars will depreciate 3% with 30% probability, depreciate 1% with 30% probability, and appreciate 1% with 40% probability for the next year. Which country do you want to borrow in? Explain why?

#2

XYZ is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are estimated below.

Currency Total Inflow Total Outflow

Canadian Dollars (C$) C$ 32,000,000 C$ 2,000,000

New Zealand $ NZ$ 4,000,000 NZ$ 2,000,000

Mexican peso MXP 12,000,000 MXP 11,000,000

Singapore dollars S$ 4,000,000 S$ 8,000,000

The spot rates and one-year forward rates as of today are

Currency Spot Rate One-Year Forward Rate

C$ $ 0.90 $ 0.93

NZ$ 0.60 0.59

MXP 0.18 0.15

S$ 0.65 0.64

1) Based on the information provided, determine the net exposure of each foreign currency in dollars.

2) Is the firm faced with translation exposure? Economic exposure? Transaction exposure? List some actions the firm can take in order to reduce the exposure(s) if there is any.