CHAPTER 9: MEASURING AND MANAGING TRANSLATION AND TRANSACTION EXPOSURE 3 e = ¥190 to ¥130: x = ¥240 – (¥220 – ¥190)/2 – 0.75 x (¥190 – e) or 225 < x < 180 e = ¥130 to ¥100: x = ¥240 – (¥220 – ¥190)/2 – 0.75 x (¥190 – ¥130) – (¥130 – e) or 190 < x < 150 Given that the price of a V6 engine was contractually set at ¥270,000, the price of an engine to Chrysler would be 270,000/x. This formula translates into the following engine prices, p, for Chrysler: e = ¥240 to ¥220: x = ¥240 and p = $1,125 e = ¥220 to ¥190: 240 < x < 225 and $1,125 < p < $1,200 e = ¥190 to ¥130: 225 < x < 180 and $1,200 < p < $1,500 e = ¥130 to ¥100: 190 < x < 150 and $1,500 < p < $1,800 2. Show how Mitsubishi’s yen revenue per engine changed over the range ¥240/$ to ¥100/$. ANSWER. At any given exchange rate, Mitsubishi’s yen revenue equals Chrysler’s dollar price multiplied by the actual exchange rate; that is, it equals p x e (or pe). As such, Mitsubishi’s yen revenue varied as follows: e = ¥240 to ¥220: p = $1,125 and 247,500 < pe < 270,000 e = ¥220 to ¥190: $1,125 < p < $1,200 and 228,000 < pe < 247,500 e = ¥190 to ¥130: $1,200 < p < $1,500 and 195,000 < pe < 228,000 e = ¥130 to ¥100: $1,500 < p < $1,800 and 180,000 < pe > 195,000 3. Suppose at the time of a new engine shipment, the exchange rate was ¥150/$. What was the dollar cost to Chrysler per engine? What was Mitsubishi’s yen revenue per engine? ANSWER. Using the formulas above, the exchange rate would be set at ¥195 and Chrysler’s dollar cost per engine would be $1,384.62 (270,000/195). This dollar figure would translate into revenue to Mitsubishi of ¥207,692.31 (150 x 1,384.62). SUGGESTED ANSWERS TO “HELP DKNY COVER UP ITS MEXICAN PESO TRANSACTION EXPOSURE DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates: Spot rate: Forward rate (30 days) 30-day put option on dollars at Mex$12.9/$ 30-day call option on dollars at Mex$13.1/$ U.S. dollar 30-day interest rate (annualized): Peso 30-day interest rate (annualized): 1. Mex$13.0/$ Mex$13.1/$ 1% premium 3% premium 7.5% 15% What hedging options are available to DKNY? ANSWER. DKNY could use a forward market hedge, a money market hedge, or a call option on the Mexican peso (a put option would be worthless as DKNY needs to buy, not sell, pesos to make its peso payment). 2. What is the hedged cost of DKNY's payable using a forward market hedge? ANSWER. In other words, what dollar cost of the payable can DKNY lock in using the forward contract? By buying pesos forward, DKNY can lock in a dollar cost of $534,351 (7,000,000/13.1).

Solution Manual for Multinational Financial Management, 11th Edition