In January, ABC Co. in U.S. signed a contract to buy a factory in U.K for £ 2,500,000 payable 3 months later in April. Since the contract is in pound rather than dollar, ABC Co. is considering hedging alternatives to reduce the risk of exchange rate from the purchase. Given the information below:

Spot rate = $1.40/£

3 month forward rate = $1.38/£

ABC's cost of capital is 11% p.a

UK 3-month borrowing rate is 2.5%

UK 3-month lending rate is 1.8%

U.S. 3-month borrowing rate is 2%

U.S. 3-month lending rate is 1.5%

April call options for £ 625,000; strike price $1.42, premium price is 1.5%

ABC Co. forecast for 3-month spot rate is $1.43/£.

The highest acceptable purchase price for this project, is $3,625,000 or $1.45/£

Show the calculation for hedging in money market, forward market, and option market.

Which hedging method will you adopt? Explain and summarize the outcomes.  

Indicate whether each of the following desired transactions would increase the demand for or the supply of foreign currency units (FCU) in the FX market and whether it would constitute upward (UP) or downward (DOWN) pressure on the price of the FCU (in USD terms) [Hint: The U.S. is the home country and demand and supply of FCU are relative to the USD]

South Africa is proposing a project that will increase sugar cane production in the country. South Africa is a net exporter of sugar cane and exports to the UK. Assume the following: • The CIF at Liverpool, UK is £360 per ton • Freight, insurance and unloading from Cape Town, a South African port to Liverpool is £15 per ton • Local port charges at South Africa is 150 Rand per ton • Transport and marketing costs from warehouse to the port in Cape Town is 120 Rand per ton • Storage, transport and marketing cost from point of production to warehouse is 50 rand per ton • No export taxes • The Exchange rate is £1= 12 rands Where the rand is the South African currency and £ is the British Pound Sterling Answer the following questions

a) Estimate the FOB price at the Cape Town port in South Africa in £

b) Estimate the FOB price in Rands

c) Estimate export parity price at a warehouse in South Africa

d) Estimate the export parity price at farm gate in South Africa.

(b) Professor GeniusAtCalculus has two lecture sections (A and B) of the same 4th year
Advanced Calculus (AMA 4301) course in Semester 2. She wants to investigate whether
section A students maybe ”smarter” than section B students by comparing their performances in the midterm test. A random sample of 12 students were taken from section
A, with mean midterm test score of 78.8 and standard deviation 8.5; and a random
sample of 9 students were taken from section B, with mean midterm test score of 86
and standard deviation 9.3. Assume the population standard deviations of midterm test
scores for both sections are the same. Construct the 90% confidence interval for the
difference in midterm test scores of the two sections. Based on the sample midterm test
scores from the two sections, can Professor GeniusAtCalculus conclude that there is any
evidence that one section of students are ”smarter” than the other section? Justify your
conclusions.
[8 marks]

(c) The COVID-19 (coronavirus) mortality rate of a you country is defined as the ratio of the
number of deaths due to COVID-19 divided by the number of (confirmed) cases of
COVID-19 in that country. Suppose we want to investigate if there is any difference
between the COVID-19 mortality rate in the US and the UK. On April 18, 2020, out of
a sample of 671,493 cases of COVID-19 in the US, there was 33,288 deaths; and out of
a sample of 109,754 cases of COVID-19 in the UK, there was 14,606 deaths. What is
the 92% confidence interval in the true difference in the mortality rates between the two
countries? What can you conclude about the difference in the mortality rates between
the US and the UK? Justify your conclusions. [8 marks]

The San Antonio Aviation Company of San Antonio, Texas, has received an order for 195,000 seats for the Airbus A-320 from the Airbus Consortium in Great Britain, payment to be in British pounds sterling. The seats will be shipped to Airbus under the terms of a letter of credit issued by the Royal Bank of Scotland on behalf of Airbus for the benefit of SA Aviation. This Letter of Credit specifies that the face value of the shipment, £20,500,000, will be paid 180 days after the Royal Bank of Scotland accepts a draft drawn in accordance with the terms of the Letter of Credit. No exchange rate is quoted in the Letter of Credit.

The current discount rate in London on 180-day banker’s acceptances is 8% per annum, and SA Aviation estimates its weighted average cost of capital to be 9% per annum. The commission for selling a banker’s acceptance in the discount market is 1.25% of the face amount.

       (a) Would the San Antonio Aviation Company gain by holding the banker’s acceptance to

             maturity or discounting the banker’s acceptance at once?

       (b) Does San Antonio Aviation Company incur any risks in this transaction?

            How might they manage these risks given the information below?

The national discount rate in the US is 3% while the rate in the UK is 5%. The current Spot Rate is: 0.6410£/$. The 180-day Forward Rate is £0.6415/$. UK lending rates are 8%. The 180 day strike price for the American Put Option to sell Sterling is: $1.5574/£ with a 0.2 cent premium per £.

4. List the correct sequence involved AND all required documents in the export of seats from the SA Aviation Company to the Airbus Consortium in the UK.

I need part d. answered please.

Auditing Question:

You are the auditor of ABC Limited for the year ended 31 December 2016. There are $20,000,000 bank balances and time deposit of $500,000,000 recorded.

Bank balances
The following are the bank reconciliations prepared by ABC:

A Bank $   B Bank $  

Balance per bank statement : 24,000,000    (3,000,000)

Reconciling items:
(i) An unpresented cheque payable (5,000,000)

to a supplier which was issued

in January 2016

(ii) Cheque deposit from a customer 4,000,000

rejected by the bank (note a)


Balance per ledger   19,000,000     1,000,000

Note:
Further information:
(a) The rejected cheque was due to inadequate funds in the customer’s bank account.

Time deposit
The financial controller of ABC provided you with a time deposit slip issued by UK Bank on 1 September 2012. Its respective terms are as follows:

Principal amount: HK$500,000,000
Term: Not specified, withdrawal of the time deposit is permitted at any time
Interest rate: 3% per annum payable on a quarterly basis
Required:

(a) For reconciling item (i), explain the possible causes of this incidence. Propose adjustment(s) to correct the misstatements that may exist in ABC's 2016 financial statements.

(b) For reconciling item (ii), propose adjustment(s) to correct the misstatements and advise the implications that may exist in ABC’s 2016 financial statements.

(c) With respect to the time deposit, the financial controller of ABC considers that it may take too long for UK Bank to reply regarding the bank confirmation. He asks you to rely on the time deposit slip instead of sending a bank confirmation request to UK Bank. Advise and explain whether you would rely only on the time deposit slip as audit evidence to confirm its existence.

3. QRS, a German (currency EUR) corporation, will pay GBP 1,000,000 after one year to its supplier in the UK. The following quotes are current in the market:

One-year UK interest rate 2.25 percent

One-year Germany interest rate 1.75 percent

Spot exchange rate 1.2491 EUR/GBP

One-year forward exchange rate 1.2400 EUR/GBP

Assume the spot rate after one year can be 1.2000 EUR/GBP, 1.2400 EUR/GBP, or 1.2800 EUR/GBP.

(i) If QRS wanted to hedge this cash flow in the forward market, what contract would it need to enter into? Show the end-of-period cash flows in Euros for the possible future spot rates if QRS enters into this forward market hedge.

(ii) If QRS wanted to hedge this cash flow in the options market, what would it need to do? Suppose that the option premium is 3% of the exercise price, and the option is at the forward. Show the end-of-period cash flows in Euros for the possible future spot rates if QRS enters into this option market hedge (and include the option premium).

(iii) If QRS wanted to hedge this cash flow in the money market, what transactions would it need to enter into? Show the end-of-period cash flows in Euros for the possible future spot rates if QRS enters into this money market hedge.

(iv) Which of the above hedging possibilities should QRS choose and why?

(v) Does covered interest rate parity hold in this problem? If not, what should the UK interest rate be in order for covered interest rate parity to hold?

1. Prior to the Financial Crisis, rating agencies mistakenly rated Mortgage Backed Securities (MBS) too high because:

1. Historically, mortgages have very low default rates.
2. The payments on the MBS’s were “insured” by credit default swaps.
3. The agencies didn’t account for the increase in sub-prime mortgages.
4. All of the above.

2. Fund from operations (FFO) of Pay Handle Ltd. Increased in 2011. In 2011 the total debt of the company remained unchanged, while additional common shares were issued. Pay Handle Ltd.’s ability to service its debt in 2011, as compared to 2010, most likely:

3. Why should credit analysts be concerned if a company’s stock trades below book value?

1. It means the company is probably going bankrupt
2. It means the company will probably incur lots of debt to buy back its undervalued stock
3. It’s a signal that the company’s asset value on its balance sheet may be impaired, suggesting less collateral in the event of a bankruptcy
4. None of the above.

4. A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in twenty-one years. If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is:

Table 20.0 (for question 20).

5. If the two bonds in Table 20.0 pay interest semiannually, the G-spread on the UK corporate bond is closest to:

Jalali-Heravi and Knouz (2002) give “four criteria of correlation coefficient (r), standard deviation (s), F value for the statistical significance of the model and the ratio of the number of observations to the number of descrip- tors in the equation” for choosing between competing regression models. Provide a detailed critique of this suggestion.

Managing the effectiveness and value of the supply chain has become a top priority. Supply chain management focuses on aligning people, processes, information, and technology to a common set of goals and objectives across the supply chain of products and services to meet the needs of all industries, companies will drive increased profitability and efficiency.    

In 2002, discount stores such as Kohl's, Target, and Wal-Mart were recording strong sales, while Kmart Corp.--the granddaddy of them all declared bankruptcy. Several factors contributed to the downfall, but one of the biggest is that Kmart didn't compete on price, a failure some attribute to its inability to master supply-chain technology and, consequently, benefit from supply-chain efficiencies. For instance, unlike Kmart, Wal-Mart used E-business system to regularly communicate sales and inventory data from every store to thousands of suppliers and buyers and deploy a private trading hub to consolidate its purchasing globally and bring suppliers online to bid on contracts--all part of a plan to lower costs and pass on savings. Promotions almost never caused problems for Wal-Mart because of its tight links with suppliers. As a result, Kmart's consumers often found that the sales merchandise and/or merchandise that were part of a promotion, was often out of stock when they reached the store.     

• If you were advising Kmart's CEO, what changes (in your own words) would you recommend to help Kmart become more profitable?     

• Given your answer to (1), explain how your recommended changes would help Kmart become more profitable and a more viable competitor to stores like Wal-Mart.    
• Please compose your answers as if you were advising a real - CEO