High frequency trading consultant
Use the following information to answer questions 1 through 4: GoBlipCrash.com (GBCC) is a Cincinnati
based high frequency trading consultant. Currently its market equity is USD 100 million. GBCC also has
USD 70 million in USD-denominated net debt and USD 30 million in EUR-denominated net debt. GBCC’s
FX business exposure (??,???
??? ) is 1.50.
Problem 1: What is GBCC’s FX equity exposure?
Problem 2: What would GBCC’s FX equity exposure be if the company would issue/raise an additional
(new) USD 40 million in EUR-denominated debt?
Problem 3: Let’s say a company has an FX business exposure of 1.3 to the NZD and an enterprise value
of USD 500 million. If this company would like to completely hedge its FX equity exposure to the NZD by
issuing NZD-denominated debt, what level (in USD) of NZD-denominated debt would be needed to
achieve this?
Problem 4: ACME Inc. is a New Mexico based producer of concert pianos. ACME has a business value
(enterprise value) of USD 60 million; an FX business exposure of 0.80 relative to the AUD; total net debt
of USD 40 million out of which USD 10 million is AUD-denominated. What is ACME’s FX equity exposure
to the AUD?
Use the following information to answer questions 5 to 7: Assume you have the long GBP position in a
6-Year at-market fixed-for-fixed USD/GBP currency swap. Payments occur at the end of each year. The
notional amount is USD 1,000,000. The interest rates are ?
??? = 5% and ?
??? = 6%. The spot rate
when the contract originated was ?0
???⁄??? = 1.50.
Problem 5: At the end of year one, how much and in what currency do you have to pay the other swap
party assuming that you would NOT settle with a difference check (please note that you cannot calculate
the difference check yet)?
Problem 6: At the end of year one, how much and in what currency should you receive by the other
swap party assuming that you would NOT settle with a difference check (please note that you cannot
calculate the difference check yet)?
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Problem 7: At the end of year 6, the spot rate is ??
???⁄??? = 1.55. Find the two difference checks, one
for the last interest payment and one for the principal payment. Recall, you took a long position in the
swap.
Problem 8: Company A makes annual USD payments of 6% on a notional of USD 15 Million. Company A
receives annual GBP payments of 7% on a notional of GBP 10 Million. Assume that the USD and GBP
interest rates are ?
??? = 4% and ?
??? = 6%. The swap currently has 4 years until it matures. The next
cash flow exchange will occur one year from today. If the current USD/GBP spot rate ??
???⁄??? = 1.71
what is the value of this currency swap for company A?
Problem 9: Duke Inc. is a major exporter of spicy American cheese products. Duke’s financials are the
following: ??
??? = ??? 15 ??????? ; ????? = 4 ??????? ; Assume that ?????
??? = ??? 3 ??????? are
EUR-denominated, so ?????
??? = ??? 1 ???????. Assume that FX business exposure to the EUR is
??,???
??? = 1.80. Duke also has a short position on a 5-year fixed-for-fixed USD/EUR swap with a notional
of ??? 2 ??????? (assume this is an at-market swap). What is the FX equity exposure of Duke Inc.?
Problem 10: Assume that the global beta of Krapl Inc. is 1.80, the local beta (relative to the U.S. market)
is 1.95. The currency risk premium is 1.30%, the global market risk premium is 7%, the U.S. market risk
premium is 5.5%. The risk-free rate of return is 4% and Krapl Inc.’s FX equity exposure is 0.6, according
to the International CAPM model. What is Krapl Inc’s cost of capital based on the Global CAPM (GCAPM)
model?
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FIN 415 Spring 2017 Homework Set 6 Answers Name:________________________________
Problem 1:
Problem 2:
Problem 3:
Problem 4:
Problem 5:
Problem 6:
Problem 7:
Problem 8:
Problem 9:
Problem 10: