Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 50 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure. To hedge against this translation exposure, Warner decides to sell 50 million euros forward. Warner can then purchase euros at the prevailing spot rate in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.30 and the spot rate for euros currently is also $1.30. Assume that the euro does indeed depreciate to a weighted average exchange rate of $1.20 over the coming year. Warner still must fulfill its forward contract to sell 50 million euros at the forward rate of $1.30. Warner earns $ million from the sale of euros at the forward rate. However, in order to obtain the needed 50 to sell, Warner needs million from this forward contract. million. Thus Warner
Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 50 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure. To hedge against this translation exposure, Warner decides to sell 50 million euros forward. Warner can then purchase euros at the prevailing spot rate in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.30 and the spot rate for euros currently is also $1.30. Assume that the euro does indeed depreciate to a weighted average exchange rate of $1.20 over the coming year. Warner still must fulfill its forward contract to sell 50 million euros at the forward rate of $1.30. Warner earns $ million from the sale of euros at the forward rate. However, in order to obtain the needed 50 to sell, Warner needs million from this forward contract. million. Thus Warner
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose that warner co
Transcribed Image Text:Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 50
million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure.
To hedge against this translation exposure, Warner decides to sell 50 million euros forward. Warner can then purchase euros at the prevailing spot rate
in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.30 and the spot rate for euros currently is also $1.30.
Assume that the euro does indeed depreciate to a weighted average exchange rate of $1.20 over the coming year. Warner still must fulfill its forward
contract to sell 50 million euros at the forward rate of $1.30.
Warner earns $
$
million. Thus Warner
million from the sale of euros at the forward rate. However, in order to obtain the needed 50 to sell, Warner needs
million from this forward contract.
$
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