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#### International Finance

October 30, 2015 0 Comment

1. Suppose Dell is selling 50,000 units in Europe at an average price of €2,000 per unit. Its costs are \$2000 per unit. Now consider a 10% fall in the Euro from \$1.20/€ to \$1.08/€.

Assume zero passthrough (i.e., Dell’s sale prices in Euro remain the same at €2,000 per unit and sales volume remains to be 50,000 units). What is Dell’s dollar profit exposure?

2. Suppose Dell is selling 50,000 units in Europe at an average price of €2,000 per unit. Now consider a 10% fall in the Euro from \$1.20/€ to \$1.08/€.

Assume zero passthrough (i.e., Dell’s sale prices in Euro remain the same at €2,000 per unit and sales volume remains to be 50,000 units).

What is the delta for Dell’s dollar profit?

3. Suppose Dell is selling 50,000 units in Europe at an average price of €2,000 per unit. Now consider a 10% fall in the Euro from \$1.20/€ to \$1.08/€.

Assume zero passthrough (i.e., Dell’s sale prices in Euro remain the same at €2,000 per unit and sales volume remains to be 50,000 units).

Which of the following would effectively hedge Dell’s dollar profit exposure?

4. Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth \$1.80/£. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the pound will be stronger, i.e., \$2.20/£. You feel that the British economy will experience a boom with a 60% probability and a slow-down with a 40% probability.

What is your estimated exposure (b) to the exchange risk by using the definition of exposure b=Cov(P,S)/Var(S)? [Hint: you need to review some basic probability/statistics to make the calculation.]

5. Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth \$1.80/£. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the pound will be stronger, i.e., \$2.20/£. You feel that the British economy will experience a boom with a 60% probability and a slow-down with a 40% probability.

Which of the following would effectively hedge your exchange risk exposure?

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