Question

Can anyone answer the question and explain it thx alot

22. Jet engine manufacturing entails enormous economies of scale. Pratt & Whitney, a large U.S. jet engine producer, faces substantial competition from Rolls-Royce, the British engine manufacturer. What would be the BEST way for P&W to cope with a dollar that has recently appreciated by 50%? a) accelerate R&D spending and cost-cutting efforts b) shift some of its production abroad c) raise the foreign currency prices of its engines sold abroad d) buy dollars forward 23. Translation exposure reflects the exposure of a company's a) foreign operations to currency movements b) foreign sales to currency movements c) financial statements to currency movements d) cash flows to currency movements 24. One argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through a) risk shifting b) risk sharing c) offshore banking d) exposure netting 25. Suppose it is 1987 and General Motors uses a money market hedge to protect an Lit 200 million payable due in one year. The U.S. interest rate at the time of the hedge was 9% and the lira interest rate was 14%. If the spot rate was Lit 1293/USD at the time of hedging and Lit 1349/USD after one year, what would the effective exchange rate be under a fully-hedged situation? a) Lit 1236.289 / USD b) Lit 1352.312 / USD c) Lit 1410.881 / USD d) Lit 1289.833 / USD

Answer 1

Q 22

Ans. (A) because focusing on R&D helps to cover wider area for economic exposures with new ideas/technology which directly helps to compete with rolls-royce & cost cutting also helps to bring down cost to enable to compete with others.

Q. 23

Ans (C) The translation exposures reflects the exposure of the company's financial statements to currency movements

Q 24

Ans (D) Exposure Netting

Q 25

Ans (A) Lit 1236.289/USD

No. of Period = 1

Foreign Deposit = 200 Million

                                =(200000000)/(1+14%)^1

                                = 175438596

Domestic Loan = 175438596*1293

                                = 226842104628

Final Domestic Value = 226842104628*(1+9%)^1

                                                =247257894044

Effective Exc. Rate = 247257894044/200 Million

                                      = 1236.28