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
Chapter20: Short-term Financing
Section: Chapter Questions
Problem 12QA
Related questions
Question
Suppose that warner co
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning