Provide a definition for a forward hedge. Assume Jersey uses a forward hedge, how much will Jersey Corporation receive in 180-days (in US dollars)? Provide a definition for a money market h

accounting discussion question

Requirements: answer questions
Write out all your answers clearly and do not skip steps
Provide equations where necessary
Construct tables or charts if required by the problem
Provide a short answer to a question, when prompted.
Credit will not be given without supporting work, even if the answer is not correct.
Each problem is equally weighted.
Problem #1: Jersey Corporation is a multinational corporation (MNC) headquartered in the United States. It expects to receive 400,000 British pounds in 180-days. It reviews the following information:
180-day U.S. interest rate is 8%
180-day British interest rate is 9%
180-day forward rate of British pound = $1.50
Spot rate of the British pound = $1.48.
Jersey Corporation is concerned about currency risk. Please answer the following questions:
Provide a definition for a forward hedge. Assume Jersey uses a forward hedge, how much will Jersey Corporation receive in 180-days (in US dollars)?
Provide a definition for a money market hedge. Suppose Jersey uses a money market hedge, How much will Jersey receive in 180-days (in US dollars)?
Should Jersey be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue from each type of hedge (part a and part b)

Problem #2: International Grocer is a multinational corporation (MNC) headquartered in El Paso, Texas. It is concerned about its Australian business, specifically the cost of materials, operating expenses, and interest expense.
Forecasted Net Cash Flows:? International Grocer
(in millions of U.S. dollars and Australian dollars)
Australian
U.S. Business Business
Sales $900 AUS$70
Cost of Materials ? 500 ? 200
Operating Expenses ? 60 ? 0
Interest Expense ? 100 ? 20

Use the preceding cost and revenue information to create a table (such as the one in class) to determine how the costs, revenue, and cash flow would be impacted under three possible exchange rates for the Australian dollar: (1) AUS$ = $1.20, (2) AUS$=$1.40, and (3) AUS$=$1.50).
Write a short paragraph analyzing your findings, possibly making a recommendation to International Grocer as to how it might change its business operations in light of your findings.

Problem #3: Covered interest arbitrage is extremely important to understanding whether it may be feasible for investors and multinational corporations to engage in currency transactions. Suppose that you are an investor from the United States and you are interested in the spread between the interest rates between New Zealand and the United States. You have $1,000,000 in U.S. dollars to invest:
The one-year interest rate in New Zealand = 6%
The one-year interest rate in the U.S. = 10%
The spot rate of the NZ$ = $0.50.
The forward rate of the NZ$ =$0.54
From the point of the U.S. investor, if you engage in covered interest arbitrage (hint: purchases NZ$ and invests in New Zealand), how much money (in USD) would this yield in one-year?
How much money (as a percentage) would this transaction yield in one-year?
Should the U.S. investor engage in covered interest arbitrage? Why or why not?
Suppose that you are a New Zealand investor and you have NZ$1,000,000 to invest (hint: purchase U.S. dollars and invests in the United States), how much money (in NZ$) would this yield in one-year?
How much money (as a percentage) would this transaction yield in one-year?
Should the New Zealand investor engage in covered interest arbitrage? Why or why not?

Problem #4: International Grocer buys cooking oils from Malaysia, priced in Malaysian ringgits, and Britain (priced in British pounds). The company was recently quoted the following bid-ask prices:
If International Grocer converted $1,000,000 to (1) British pounds, (2) then British pounds to Malaysian ringgits, and (3) back to United States dollars, would it experience a gain or a loss?

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