Question Details

Kanab Co. has a subsidiary in Canada that will generate earnings 


1. Applying the Value-at-Risk Method. You use today- spot rate of the Brazilian real to forecast
the spot rate of the real for one month ahead. Today- spot rate is $.4558. Use the value-at-risk
method to determine the maximum percentage loss of the Brazilian real over the next month based
on a 95 percent confidence level. Use the spot exchange rates at the end of each of the last 6
months as shown below to conduct your analysis. Forecast the exchange rate that would exist
under these conditions.

2. Assessing Translation Exposure. Kanab Co. and Zion Co. are U.S. companies that engage in
much business within the U.S. and are about the same size. They both conduct some international
business as well.
Kanab Co. has a subsidiary in Canada that will generate earnings of about C$20 million in each of
the next 5 years. Kanab Co. also has a U.S. business that will also receive about C$1 million (after
costs) in each of the next 5 years as a result of exporting products to Canada that are denominated
in Canadian dollars.
Zion Company has a subsidiary in Mexico that will generate earnings of about 1 million pesos in
each of the next 5 years. Zion Co. also has a business in the U.S. that will receive about 300
million pesos (after costs) in each of the next 5 years as a result of exporting products to Mexico
that are denominated in Mexican pesos.
The salvage value of Kanab- Canadian subsidiary and Zion- Mexican subsidiary will be zero in
5 years. The spot rate of the Canadian dollar is $.60 while the spot rate of the Mexican peso is
$.10. Assume the Canadian dollar could appreciate or depreciate against the U.S. dollar by about
8% in any given year, while the Mexican peso could appreciate or depreciate against the U.S.
dollar by about 12% in any given year. Which company is subject to a higher degree of translation
exposure? Explain.




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