Please help with the following questions 1. Assume that General Electric (GE)’s
ID: 1174962 • Letter: P
Question
Please help with the following questions
1. Assume that General Electric (GE)’s current assets are $401 billion, fixed assets are $797 billion, current liabilities are $323 billion, and long-term liabilities are zero. Calculate GE’s translation exposure using current/non-current, monetary/non-monetary, temporal, and current rate methods. (Hint: You won’t be able to calculate using all the four methods based on given information. If you can’t calculate using a method, state so and include the reason.)
2. Toyota has exposed assets of ¥7 billion and exposed liabilities of ¥5 billion. During the year, the yen appreciates from ¥110/$ to ¥80/$.
a. What is Toyota's net translation exposure at the beginning of the year in yen? In dollars?
b. What is Toyota's translation gain or loss from the change in the yen's value?
c. At the start of the next year, Toyota adds exposed assets of ¥1.5 billion and exposed liabilities of ¥2 billion. During the year, the yen depreciates from ¥80/$ to ¥115/$. What is Toyota's translation gain or loss for this year? What is its total translation gain or loss for the two years
d. What is Toyota’s total translation gain or loss for the two years?
3. Suppose an agribusiness in Texas exports its crops. It expects an 18 million peso invoice for an export to Mexico to be paid in 90 days. The current spot and 90-day forward rates are $0.7502/Peso and $0.7422/Peso respectively.
a. Calculate the company’s peso transaction exposure associated with this fee.
b. If the spot rate expected in 90 days is $0.7489, what is the expected U.S. dollar value of the invoice?
c. What is the hedged dollar value of the invoice?
4. A U.S.-based MNC imports 30 percent of its supplies from Europe. Exports to Europe, which are invoiced in euros, account for approximately 50 percent of its revenues. In 1-2 pages, explain how the MNC can reduce its economic exposure to exchange and interest rates fluctuations.
Explanation / Answer
1) Based on the current/non current method, GE's translation exposure is $401 billion - $401 billion that is 0. It is not possible to calculate translation exposure under monetary/non-monetary because the monetary/non monetary breakdown of assets and liabilities are not available. Also, GE's temporal exposure cannot be determine because the breakdownof current assets between inventory and monetary assets is not available. Under the current rate method, GE's exposure would be $875 billion(401+797-323)
2) Toyota's net translation exposure is Yen 2 billion (7-5). When converted into dollars, the translation exposure (2 billion/110) of $ 18,181,818.
b. The end of the year exchange rate, Toyota's translation exposure equals $25000000(2 billion/80). The net result is a translation gain for the year of $ 6818182 (25000000-18181818)
c.New translation exposure at start of the year is yen 1.5 billion (Yen 2 billion + Yen 1.5 billlion- Yen 2 billion). Based on this exposure and the change in exchange rate during the year, the translation loss for the year would be $5706521.74 (1.5*(1/80-1/115)). Hence the two year period, Toyota has realised a translation gain of $1111660.26 (6818182-5706521.74)
3) a) Disney's peso transaction on this invoice equals Peso 18 million or $13503600 (18000000*0.7502)
b) Expected value of this invoice in 90 days is $13480200 (18000000*0.7489)
c The hedged value of this invoice in 90 days is $13359600(18000000*0.7422)