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1. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a...
More:1. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information: The spot exchange rate is $.8924/€ Document Preview: 1. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information: The spot exchange rate is $.8924/€ The six month forward rate is $.8750/€ OTI’s cost of capital is 11% The Euro zone 6-month money market rates are 7%-9% pa The U.S. 6-month money market rates are 6%- 8% pa The premium (option price) for December call options with strike price $.90 is 1.5% OTI’s forecast for 6-month spot rates is $.91/€ The budget rate, or the highest acceptable purchase price for this project, is $2,300,000 or $.92/€ Assume that analysts consider the following likely exchange rate scenarios each with an equal probability of occurance (i.e. 33.3%) Strong Dollar: $0.8600 Neutral :$0.8750 Weak Dollar :$0.9500 Assume that Oregon selected to use forward hedge. What will be the expected cost of the rail cars? (Hint: Use statistical expectation to calculate the expected cost) $2,150,000 2,160,527 2,241,778 $2,187,500 $2,350,000 2. Firm "J" is a U.S.-based MNC with net cash inflows of German marks and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Firm "K" is a U.S.-based MNC that has the same exposure as Firm "J" in these currencies, except that its Sunland francs represent cash outflows. Which firm has a higher exposure to exchange rate risk? a. Firm "J". b. Firm "K". c. Firms "J" and "K" have about the same level of exposure. d. Neither firm has any exposure. Firm "J". Firm "K". J and K have same level of exposure Neither firm has any exposure 3....

 







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