College Bowl. Round #4. Question #1. As a producer of automobiles, you are currently importing parts from Mexico. If you were to expand sales of automobiles overseas, which market should you choose (assuming that you can generate the same sales in each market).
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As a producer of automobiles, you are currently importing parts from Mexico. If you were to expand sales of automobiles overseas, which market should you choose (assuming that you can generate the same sales in each market)
Great Britain: Corr(GBP, MXP) = .56
Japan: Corr(JPY, MXP) = -.76
Canada: Corr(CAD, MXP) = 0
As the Mexican Peso appreciates (raising your costs), the Pound Appreciates as well (raising your revenues)
Your forecast of the percentage change in the Australian Dollar has a point estimate of 0 and a standard deviation of 2%. If you have an obligation to purchase AUD 10,000 worth of goods from Australia, (AUS/USD = .75), within what range will your costs lie 95% of the time?
[ $7,500 +/- 4%] = [ $7,200, $7,800]
You are planning on exporting software to Europe. You have estimated the demand curve for your product and have found the price elasticity to be 2.5. Should you contract your sales to Europe in dollars or Euro?
If you contract in dollars, changes in the USD/EUR exchange rate will affect the Euro price in Europe. With a high elasticity, Europeans are very responsive to price changes. You should price in Euro.
If the inflation rate is 2%, what is your point estimate for the %change in the exchange rate?
% Change in e = .02 + 2(2) = 4.5%
If the inflation rate is 2%, what is your 95% confidence interval?
[ 4.5% +/- 3.6%] = [ .9% , 8.1%]
Suppose that you have sales originating in Japan (denominated in Yen). The Yen is currently selling in forward markets at a 2% discount. If you are risk neutral, should you lock in your dollar revenues through the forward markets?
No. The regression above states that in the past, whenever the yen is selling at a discount (expected to depreciate), it actually ends up appreciating in the spot market – which would raise the dollar value of your Japanese sales
You will need to purchase EUR 100,000 30 days from now. You can hedge your risk by buying Euro forward for $1.35 apiece. Currently, the Euro is trading at $1.33 and you have forecasted to Euro to appreciate by 2% against the dollar with a standard error of 4%. What would be the 95% VAR of the hedge?
95% Confidence interval = [ 2% +/- 8%] = [ -6%, 10%]
= [ $1.25, $1.46]
$125,000 - $135,000 = $10,000
What's the difference between transaction exposure and translation exposure?
Transaction exposure involves actual currency conversions while translation only involves potential currency conversions
What’s the difference between transaction exposure and economic exposure?
Transaction exposure involves fixed cash flows (currency price variability changes their dollar value) while economic exposure involves variable cash flows (currency price variability changes the cash flows)
You are currently importing $100,000 worth of goods from Mexico and $300,000 worth of goods from Canada. You have the following information:
Std. Dev. (MXP) = 2
Std. Dev (CAD) = 1
CORR(MXP, CAD) = -.6
What is the Std. Dev. Of your costs?
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