Accounting finance (800 words)

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Business Finance

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Question 1 (15 marks) In January 2015, the Swiss National Bank (SNB) suddenly announced that it would no longer hold the Swiss franc at a fixed exchange rate with the euro. The franc was pegged at 1.2 Swiss francs per euro from 2011 to 2015. A day after de pegging, the franc's value had fallen to just 0.85 francs. Hedge funds across the world made big losses. The Swiss stock market collapsed. Required: Discuss the reasons for the SNB de-pegging the franc and evaluate the hedging strategies implemented by the Swiss exporters and other domestic firms. Word count requirement: 800. u 20% 21:00 Question 2 (15 marks) US-based company ABC Co. expects to receive a 50 million euro payment from its various exports one year from now. However this payment may rise to 60 million or fall to 40 million euro. ABC can use any one of the following strategies to deal with the exchange rate risk. (1) Unhedged strategy (ii) Forward hedge strategy (iii) Money market hedge (iv) Option hedge The spot rate of the euro as of today is $1.10 and the 1- year forward rate is $1.13. The annual interest rate in the United States is 5.5% versus an annual interest rate of 2% in the euro zone. The forward rate quoted to ABC does not necessarily satisfy interest rate parity (perhaps ABC's bank added in commission costs). Put options on euros are available with an exercise price of $1.11, an expiration date of one year from today, and a premium of $0.06 per unit. Call options on euros are available with an exercise price of $1.15, an expiration date of one year from today, and a premium of $0.08 per unit. Required: a) Identify the risks of each strategy and estimate the dollar cash flows it will receive as a result of using each strategy. To do so you must consider a number of different exchange rate outcomes at the end of one year ranging from the dollar depreciating to the dollar appreciating against the euro. (10 marks) b) Explain which hedge you think is optimal for ABC. . (5 marks)
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Running head: ACCOUNTING FINANCE

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Accounting Finance
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Date:

ACCOUNTING FINANCE

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Question 1
There are various reasons as to why the SNB (Swiss National Bank) decided to stop
holding the Swiss Franc within a capped exchange rate with the regional Euro. One of such
reasons is that the SNB realized that it needed large quantities of reserves in order to continue
maintaining the pegged exchange rate, which meant that the SNB had to constantly purchase or
sell the domestic currency. Besides, the setting of the Euro within a fixed exchange rate against
the Swiss Franc had compelled the SNB to print large quantities of francs, which at the long run
can result to the emergence of hyperinflation within the country. In addition, it is likely that SNB
discovered the capping of Euro resulted to undesired economic side effects, which is actually in
other terms, a higher inflation. This is on the basis of the fact that the more currency reserves
within a country, the monetary supply...


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