“Not another one!” groaned George Luger.This was the third memo that he had received that morning fromthe CEO of VCR Importers. It read as follows:
From: CEO’s Office
To: Company Treasurer
I have been looking at some of our foreign exchange deals and they don’t seem to make sense.
First, we have been buying yen forward to cover the cost of our imports.You have explained that this insures us against therisk that the dollar may depreciate over the next year, but it is incredibly expensive insurance. Each dollar buys only 101.3 yen whenwe buy forward, compared with the current spot rate of 107.52 yen to the dollar. We could save a fortune by buying yen as andwhen we need them rather than buying them forward.
Another possibility has occurred to me. If we are worried that the dollar may depreciate (or do I mean “appreciate”?), whydon’t we buy yen at the low spot rate of ¥107.52 to the dollar and then put them on deposit until we have to pay for the VCRs? Thatway we can make sure that we get a good rate for our yen.
I am also worried that we are missing out on some cheap financing. We are paying about 8 percent to borrow dollars for oneyear, but Ben Hur was telling me at lunch that we could get a one-year yen loan for about 1.75 percent. I find that a bit surprising,but if that’s the case, why don’t we repay our dollar loans and borrow yen instead?
Perhaps we could discuss these ideas at next Wednesday’s meeting. I would be interested in your views on the matter.
How should George respond to Jill’s memo with respect to the following issues?(Hint: Incorporate detailed calculations / working in support of your answers)
a) Is the forward purchase of the Yen “incredibly expensive insurance”?
b) Would the company be better if it purchased Yen and “then put them on deposit”?
c) Should the company “repay its dollar loans and borrow yen instead”?
Discuss and show graphically how the introduction of a risk free asset in portfolio theory allows us to identify the optimal portfolio of an investor. How is the efficient set defined in the case of a portfolio containing risky assets and positive or negative amounts of the risk free rate? Your analysis and discussion should be supported with appropriate examples and references from the literature.Guidelines:
Please read all questions and information provided carefully. Answer should be made in appropriate length keeping in view the requirement of each question and total word counts allowed.
In addition, your assignment should demonstrate the following qualities:
A critical appreciation of relevant literature and its use to support argument, substantiate calculations and other aspects of the assignment.
Taking ownership of the content, being prepared to debate and argue a personal position, and providing evidence of evaluative skills. A submission made up of extracts from published sources which is descriptive or simply just theoretical regurgitation is not acceptable. Your submission must have interpretation and consideration of the challenges and issues of taking theory into practice.
Logical flow of ideas and treatment; appropriate selection of real world factors related to the companies under scrutiny.
Evidence of additional personal research, and the ability to analyse material from a variety of appropriate relevant perspectives.
Presentation, structure, appropriateness of methodology, breaking into section headings/subheadings, tidiness.
Marks will be awarded for proper referencing and originality of work. Also note that plagiarism is a serious offence and your submission will be electronically checked.
Your report must be handed in electronically no later than given date of submission.