Individual project 3

Individual project 3

Question 1

Answer 1

Spot Rate

1.00 EUR

=

1.25945 USD

Euro

?

US Dollar

1 EUR = 1.25945 USD

1 USD = 0.793998 EUR

1.00 CNY

=

0.157473 USD

Chinese Yuan Renminbi

?

US Dollar

1 CNY = 0.157473 USD

1 USD = 6.35031 CNY

Source: Data retrieved from www.xe.com

US revenue

$500 million

US Operations

$300 million

US ROS

10%

Germany Operations

€100 Million

Germany ROS

12%

Shanghai Operations

650 million Yuan

China ROS

8%

Net Income United States

$ 30.00

Million

Net Income Germany

€ 12.00

Million

Net Income China

? 52.00

Million

Repatriation

Germany

$ 15.11

Million

China

$ 8.19

Million

ROS Germany

79%

ROS China

16%

12- Month Forward Rate

Forward Rate 1$ =====>

0.062781087

Question 2

Answer 2

A spot transaction

A spot contract (spot deal or short spot) is a standardized contract on securities , foreign exchange , or fungible items with similar terms, which is to meet no later than two trading days after the conclusion of the two parties. Complementary concept is the forward contract. Spot transactions are financial transactions that often occur with foreign exchange purchases. The terms of this type of transaction call for immediate payment for the currency.

An outright forward

Many companies hedge foreign exchange risks by the usage of forward contracts. Forward contracts are derivatives that allow U.S. firms to either buy or sell currency forward at a set price with a transaction at a future date. Firms will sell their foreign exchange earnings forward if they believe the currency in which the earnings are generated (for example, Japanese yen) will depreciate against the dollar over the time the earnings will materialize(Kieschnick 1998).

A foreign-exchange swap

A foreign exchange (FX swap) is a financial market transaction from a foreign exchange - cash transaction (Spot FX) and a forward contract exists (FX forward). Two currencies are per spot against each other and exchanged later swapped back. Both an FX swap transactions are completed simultaneously and with the same counterparty. In contrast, one is currency swap, an exchange of principal amounts in different currencies, including the related interest payments.

Question 3

Answer 3

If firm uses currency swap it will allow active currency exposure management - i.e. hedging translation risk. Moreover it will also allow access to markets with the cheapest source of funds - comparative advantage. Another benefit of forward Swap is that it does not involve any up frond cost, and does not obligate any counterparty who wants to enter into a swap contract.

On the other hand currency option is an agreement, which takes place between two parties, in this agreement option buyer purchases and pay premium amount to seller, as it provides right but does not give an obligation to sell or buy specified amount of currency on any particular date (Michael 1986).

Question 4

Answer 4

In order to avoid, United States corporate tax rates, it is important that domestic companies at international level, that helps in keeping foreign subsidiaries operating in overseas, in the above scenario it was important to bring back money back to united states to see the impact of repatriation. However, United States marginal tax rates are highest among the developed countries; some of the financial experts believe that highest cost of repatriating foreign earnings have led to billions of dollars that have become frozen in financial systems focuses on tax friendly countries (Harprper 2004).

Question 5

Answer 5

There are various ways and means ...