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For EACH of the following company transactions, indicates whether the company in question should purchase forward...

For EACH of the following company transactions, indicates whether the company in question should purchase forward contract, sell forward contract, purchase a call option, or purchase a put option, or none, to limit its exposure to exchange rate risk. Answers can be more than one.

a. A U.S. MNC, Independent Bank, will receive interest payments denominated in Colombian peso.

b. A U.S. MNC, Merged Co. will sell inventory software applications to Mexico denominated in Mexican peso.

c. A U.S. MNC, Bahamas Inc., will purchase Canadian papers and the contract is denominated in U.S. dollars.

d. A Singapore MNC, Tema Inc., may have projects in Thailand that need funds in Thailand Baht. The company is in the bidding process and the outcome is not known yet.

Solutions

Expert Solution

We are selling forward when the receivable is in foreign currency and buying forward when the payable is in foreign currency
We are buying call option when payable is in forward currency and buyng put option when the receivable is in foreign currency
We are using forwards only when the payments/receivables are guaranteed and not dependent on winning of bid.

a. A U.S. MNC, Independent Bank, will receive interest payments denominated in Colombian peso.
Sell forward or Purchase a put option

b. A U.S. MNC, Merged Co. will sell inventory software applications to Mexico denominated in Mexican peso.
Sell forward or Purchase a put option

c. A U.S. MNC, Bahamas Inc., will purchase Canadian papers and the contract is denominated in U.S. dollars.
Purchase forward or Purchase a call option

d. A Singapore MNC, Tema Inc., may have projects in Thailand that need funds in Thailand Baht. The company is in the bidding process and the outcome is not known yet.
Purchase a call option

jeff jeffy answered 1 month ago
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