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risk management tools and techniques from forward contracts, future contracts, and derivatives.

repare written responses to the Mini Case problems from the text below:

 

Prepare a 350 word summary in which you compare and contrast at least two risk management tools and techniques from forward contracts, future contracts, and derivatives.

 

Make a recommendation to management about which technique is most appropriate from a risk management standpoint. Support your findings by including answers and rationale from the Mini Case.

Mini Case

For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm.

Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor:

  • To: Business Reporter
  • From: Perry White, Editor, Daily Planet
  • Re: Upcoming Series on Multinational Finance

In your upcoming series on multinational finance, I would like to make sure you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the same script because accuracy has always been the cornerstone of the Daily Planet. I’d like a response to the following questions before we proceed:

  1. What new problems and factors are encountered in international, as opposed to domestic, financial management?
    1. What does the term arbitrage profits mean?
    2. What can a firm do to reduce exchange risk?
    3. What are the differences among a forward contract, a futures contract, and options?

Use the following data in your responses to the remaining questions:

Selling Quotes for Foreign Currencies in New York
Country—Currency Contract

$/Foreign
Canada—dollar Spot

.8450
  30-day

.8415
  90-day

.8390
Japan—yen Spot

.004700
  30-day

.004750
  90-day

.004820
Switzerland—franc Spot

.5150
  30-day

.5182
  90-day

.5328
  1. An American business needs to pay (a) 15,000 Canadian dollars, (b) 1.5 million yen, and (c) 55,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries?
    1. An American business pays $20,000, $5,000, and $15,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?
    2. Compute the indirect quote for the spot and forward Canadian dollar contract.
    3. You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?
    4. Compute the Canadian dollar/yen spot rate from the data in the preceding table

 



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