BFC3240 : WEEK 12
Continued from week 10, Operating Exposure Management
Questions:
Question 1: In contrast to southern Europe, northern Europe, especially Germany, exports more
complex and brand-name manufactured items, such as automobiles, machine tools, and specialty
chemicals. To what extent would German exports be sensitive to pricing pressures from a strong euro?
How would this affect German firms’ foreign exchange exposure?
Question 2: Italian companies exporting food products such as Parma ham and Parmigiano cheese
did not see a drop in exports, nor did high-fashion exporters such as Armani and Valentino despite
the strong euro. Explain why this might have been the case.
Question 3: E & J Gallo is the largest winemaker in the United States. It gets its grapes in California
(some of which it grows itself) and sells its wines throughout the United States. Does Gallo face
currency risk? Why and how?
Question 4: A U.S. company needs to borrow $100 million for a period of seven years. It can issue
dollar debt at 7 percent or yen debt at 3 percent.
a.
Suppose the company is a multinational firm with sales in the United States and inputs purchased in Japan. How should
this affect its financing choice?
b.
Suppose the company is a multinational firm with sales in Japan and inputs that are primarily in dollars. How should
this affect its financing choice?
Question 5: Huaneng Power International is a large Chinese company that runs coal-fired power
plants in five provinces and in Shanghai. It has close to $1.2 billion in U.S. dollar debt whose proceeds
it has used to purchase equipment abroad.
a.
b.
What currency risks does Huaneng face?
Do its lenders face any currency risks? Explain.