Question 1 Coombes is a U.S.-based IT company. In September Coombes delivers a large shipment of...

Question 1 Coombes is a U.S.-based IT company. In September Coombes delivers a large shipment of computer equipment to a major distributor in Seville. The receivable, €10 million, is due in 90 days, standard terms for the IT industry in Europe. Note that the sale is large relative to Coombes’s other business and that they currently have no other foreign customers. Required: Evaluate the arguments for and against hedging. Consider this from both the company’s and the shareholder’s viewpoint. Recommend whether Coombes should take hedging in this example.

Expert Solution

The receivables are huge from the company's point of view and any huge currency risk exposure is a point of concern for the company and its shareholders. Currency exposure and risk is something that a trading firm can better understand, analyze and take bets on. But for a IT firm with no competency in understanding market risk from currency fluctuations, this will be an unwanted risk as currency is quite volatile in today's market. Thus sufficient hedging at appropriate cost will be the best option to avoid currency risk both for company and shareholders.

Pros of hedging

1. Avoid currency risk

2. Certainty in cash flows

Cons of hedging

1. Cost associated with hedging depending on the instrument used (futures or options or something else)

2. Loss if currency moves in a direction which could have led to profit if hedge was not in place

3. Currency hedging is not simple and requires sufficient expertise and analysis

jeff jeffy answered 1 year ago

A delivery truck driver for Coca-Cola delivers a shipment of merchandise to a corner store in...

A delivery truck driver for Coca-Cola delivers a shipment of merchandise to a corner store in Hartford. The driver does not collect any cash payment from the store, but instead gives the store owner an invoice with terms 2/10, n/30. Describe two preventive- control-related reasons why the driver does not collect any cash.

1. A retailer decides that he will reject a large shipment of light bulbs if there...

1. A retailer decides that he will reject a large shipment of light bulbs if there is more than one defective bulb in a sample of size 10. If the defective rate is 0.10, what is the probability that the retailer will reject the shipment? 2. Find the value of a in the following discrete probability distribution: x P(x) -2 a 0 0.35 2 0.25

1. a) A fishery sent a shipment with several boxes of salmon to a large seafood...

1. a) A fishery sent a shipment with several boxes of salmon to a large seafood restaurant. The restaurant’s quality manager inspected one randomly selected box containing 16 salmon. Summary statistics for the weight (in lbs) of the salmon in the inspected box are given below. Mean 5.1 Median 5.1 Lower quartile 4.5 Upper quartile 6.1 Standard deviation 1.4 Min 3.2 Max 8.1 i. Compute the lower fence (lower bound) for determining outliers using the IQR Rule. Round to 2...

Question 8 . On January 1, 2008, T Systems, a U.S.-based company, purchased a controlling interest...

Question 8 . On January 1, 2008, T Systems, a U.S.-based company, purchased a controlling interest in G Company located in Paris, France Direct exchange rates for Euros are: Dollars per Euro January 1, 2008 $.92 December 31, 2008 .87 Average for 2008 .76 Dividend declaration and payment date .80 Required: Translate the year-end balance sheet and income statement of the foreign subsidiary using the temporal rate method of translation. Euros Translation Income Statement Rate U.S. Dollars Revenue 75,000 Operating...

Question 1: Al Omani (SAOG) one of the large manufacturing company based in Sohar, has made...

Question 1: Al Omani (SAOG) one of the large manufacturing company based in Sohar, has made all the arrangements in the beginning of the year 2017, to give a bulk purchase order to their major supplier Khalid Traders a Partnership firm based in Mucat, in order to start the production in their new factory. On 10th January 2017 Al Omani company purchased (goods for credit) materials worth OR.200,000 from Khalid Traders .But Al Omani company agreed to pay the full...

Worcester Tool Company is a large, U.S.-based, multinational corporation with subsidiaries in eight different countries.

Analytical Application Using International Financial Markets Worcester Tool Company is a large, U.S.-based, multinational corporation with subsidiaries in eight different countries. The parent of Worcester provided an initial cash infusion to establish each subsidiary. Each subsidiary, however, has had to finance its own growth since then. The parent and subsidiaries of the firm typically use Citigroup (with branches in numerous countries) when possible to facilitate any flow of funds necessary. a. Explain the various ways in which Citigroup could facilitate...

On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 2,800,000 Chinese...

On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 2,800,000 Chinese yuan loan from a Chinese bank at an interest rate of 4 percent per year. The company makes interest payments annually on September 30 and will repay the principal on September 30, 2022. PFI prepares U.S. dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows: Date U.S. Dollar per Chinese Yuan (CNY) September 30, 2020 $ 0.170 December...

Question 1 Excise tax rates on tobacco and tobacco products increase in March and September based...

Question 1 Excise tax rates on tobacco and tobacco products increase in March and September based on average weekly ordinary time earnings. Perform a web-search to determine the amount of excise tax charged (as at 1 January 2018) on a standard 20 packet of cigarettes. If the standard packet is sold for a price of $30, how much is the before tax price? Illustrate using the demand and supply model, the effects of a tax imposed on sellers of tobacco...

Covington Co. is a large U.S.-based MNC with large subsidiaries in France. It has issued stock...

Covington Co. is a large U.S.-based MNC with large subsidiaries in France. It has issued stock in France in order to establish its business. It could have issued stock in the U.S. and then used the proceeds in order to support the growth in Europe. What is a possible advantage of issuing the stock in France to finance French operations? Why might the French investors prefer to purchase the stock that was issued in France rather than purchase the stock...

Door2DoorCo are a large courier company who have just received a shipment of X new vans....

Door2DoorCo are a large courier company who have just received a shipment of X new vans. They wish to lock in a tyre supply contract to keep these vans well shod over the Y months that they intend to keep the vans. The vans come with low quality tyres that will need to be replaced in 2 months. Two suppliers, ThriftyTread and WiserWheels have expressed interest at supplying tyres at a fixed price for the duration. The offers are summarised...

Question