CEO organizes a meeting with the CFO regarding a new European investment. She is concerned the...

 

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CEO organizes a meeting with the CFO regarding a new European investment. She is concerned the investment might be subject to currency risk and wants advice. The CFO knows you have an MBA and asks you to prepare some analysis for the meeting. You are told the CEO wants to invest $1,000,000 into a plant just outside Paris that will shorten distribution time and costs for the company's flagship skin cream product. The best estimate of returns from the investment show an expected return on investment of 25% in local currency, the Euro. You look up and find the current EUR/USD exchange rate is 1.20, so one Euro can be currently exchanged for $1.20. The CFO tells you to call Rhonda at Chase bank to find out the hedging possibilities. Rhonda tells you that the December year end currency pricing indicates your firm could sell Euros in advance for 1.22, to lock in and guarantee the future year end exchange rate as a hedge. In your presentation, what would you propose is the expected return on this investment after using the hedge proposed by your banker? You note in your research that the EUR/USD exchange rate has moved between 1.03 and 1.25 in the past five years. Show how those two exchange rates would have impacted this current decision, if the investment were unhedged. CEO organizes a meeting with the CFO regarding a new European investment. She is concerned the investment might be subject to currency risk and wants advice. The CFO knows you have an MBA and asks you to prepare some analysis for the meeting. You are told the CEO wants to invest $1,000,000 into a plant just outside Paris that will shorten distribution time and costs for the company's flagship skin cream product. The best estimate of returns from the investment show an expected return on investment of 25% in local currency, the Euro. You look up and find the current EUR/USD exchange rate is 1.20, so one Euro can be currently exchanged for $1.20. The CFO tells you to call Rhonda at Chase bank to find out the hedging possibilities. Rhonda tells you that the December year end currency pricing indicates your firm could sell Euros in advance for 1.22, to lock in and guarantee the future year end exchange rate as a hedge. In your presentation, what would you propose is the expected return on this investment after using the hedge proposed by your banker? You note in your research that the EUR/USD exchange rate has moved between 1.03 and 1.25 in the past five years. Show how those two exchange rates would have impacted this current decision, if the investment were unhedged.

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Investment Analysis with Currency Hedging Introduction This analysis examines the expected return on a 1 million investment in a European plant consid... View the full answer