Question Details

Which firm is exposed to the most exchange rate risk 


1. Assessing Currency Volatility. Zemart is a U.S. firm that plans to establish international business
in which it will export to Mexico (these exports will be denominated in pesos) and to Canada
(these exports will be denominated in Canadian dollars) once a month and will therefore receive
payments once a month. It is concerned about exchange rate risk. It wants to compare the standard
deviation of exchange rate movements of these 2 currencies against the dollar on a monthly basis.
For this reason, it asks you to:
a. Estimate the standard deviation of the monthly movements in the Canadian dollar against the
U.S. dollar over the last 12 months.
b. Estimate the standard deviation of the monthly movements in the Mexican peso against the
U.S. dollar over the last 12 months.
c. Determine which currency is less volatile.
You can use the oanda.com Web site (or any legitimate Web site that has currency data) to obtain
the end of month direct exchange rate of the peso and the Canadian dollar in order to do your
analysis. Show your work. You can use a calculator or a spreadsheet (like Excel) to do the actual
computations.
2. Exposure of Net Cash Flows. Each of the following U.S. firms is expected to generate $40
million in net cash flows (after including the estimated cash flows from international sales if there
are any) over the next year. Ignore any tax effects. Each firm has the same level of expected
earnings. None of the firms have taken any positions in exchange rate derivatives to hedge their
exchange rate risk. All payments for the international trade by each firm will occur one year from
today.
Sunrise Co. has ordered imports from Austria, and its imports are invoiced in euros. The dollar
value of the payables (based on today- exchange rate) from its imports during this year is $10
million. It has no international sales.
Copans Co. has ordered imports from Mexico, and its imports are invoiced in U.S. dollars. The
dollar value of the payables from its imports during this year is $15 million. It has no international
sales.
Yamato Co. ordered imports from Italy, and its imports are invoiced in euros. The dollar value of
the payables (based on today- exchange rate) from its imports during this year is $12 million. In
addition, Yamato exports to Portugal and its exports are denominated in euros. The dollar value of
the receivables (based on today- exchange rate) from its exports during this year is $8 million.
Glades Co. ordered imports from Belgium, and these imports are invoiced in euros. The dollar
value of the payables (based on today- exchange rate) from its imports during this year is $7
million. Glades also ordered imports from Luxembourg and these imports are denominated in
dollars. The dollar value of these payables is $30 million. Glades has no international sales.
Based on this information, Which firm is exposed to the most exchange rate risk ? Explain.




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