Explain the two main

decision criteria that a treasurer must consider before choosing between

hedging alternatives.

Briefly discuss 2 different reasons why some products/services can pass

through the currency risk to the foreign customers? Provide an example for

each reason.

Nucor Corporation is a producer

of steel sheets and related products based in Charlotte, North Carolina, USA.

The company exports manufactured products globally and import iron ore from

different sources. Nucor just purchased AUD 50,000,000  worth of iron ore

from an Australian mining company payable in 9 months. Nine-months call option

on AUD 50,000,000 at an exercise price of USD0.6/AUD with a premium of 3% , and

a nine-month put option on AUD50,000,000 at an exercise price of USD0.65/AUD at

a premium of 2% are available in the market. The current spot price and

nine-month Forward ratess are USD0.62/AUD and USD0.64/AUD respectively.

Australian borrowing and investment rates are 5% p.a and 3% p.a, respectively.

Nucor’s WACC is 7% p.a.

Provide the required information

of proposed hedging strategies available for Nucor, in the provided tables.

FULL WORKOUT IS REQUIRED! 

International

Business Machines(IBM) Corporation and Nokia Corporation have a strong business

tie. They have agreed to share their risk in the currency market to reduce

their exposures to cash flow volatilities in the future. The agreement states

that Nokia will pay the spot rate as long as it is between USD1.2550/EUR and

USD1.1550/EUR, and will share the risk of exchange rate equally with IBM if it

falls outside this range. The agreement is incepted today and lasts for 1 year.

Nokia imports 500,000 units of microchips each month and must pay the invoice

after a month.

What would be the EURO

cost of import for Nokia if the exchange rate changes to USD1.1215/EUR next

month and the microchip price remains at 150,000 USD per 1000 units. (answer in

two decimals, no dollar sign, no comma separator)

Anthony

Burke, A currency fund manager believes that the Australian dollar will

appreciate versus the U.S. dollar over the next 120 days, and has decided to

speculate in the options market. The currency spot rate is USD0.71/AUD. The

manager may choose between the following options:

·        

·        

1. Should Anthony buy

   the Call or Put on AUD?

2. What is the

   break-even spot price on the option purchased in part (i)?

3. Using the answer

   from part (i) what is Anthony’s payoff and net profit(including premium) if the

   spot rate at the end of 120 days is indeed AUD0.7515/USD?

The First World War precipitated a

halt in the gold standard for fixed exchange rates because it:

Under a fixed exchange rate system,

the government bears the responsibility to ensure that the BOP is near zero. If

the sum of the current and capital accounts does not approximate zero, the

government is expected to intervene in the foreign exchange market by buying or

selling official foreign exchange reserves. If the sum of the first two

accounts is GREATER THAN ZERO, a ________ demand for the domestic currency

exists in the world. To preserve the fixed exchange rate, the government must

then intervene in the foreign exchange market and ________ domestic currency

for foreign currencies or gold to bring the BOP back near zero.

An economy is moving towards very

weak growth. What consequences can be expected on the horizon?

Balance of payment (BOP) data may

be important for any of the following reasons:

Consider these debt strategies

being considered by a corporate borrower. Each is intended to provide

$1,000,000 in financing for three years.

    Strategy #1: Borrow

$1,000,000 for three years at a fixed rate of interest of 7%.

    Strategy #2: Borrow

$1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset

annually. The current LIBOR rate is 3.50%

   Strategy #3: Borrow

$1,000,000 for one year at a fixed rate, and then renew the credit annually.

The risk of strategy #3 for the corporate

borrower is: