Copper Kettle, Inc of the United States manufactures (what else?) copper kettles. Copper Kettle imports its raw materials from Chile, and sells most of its goods in the domestic United States. Accounts that are denominated in Chilean pesos are indicated in the balance sheet below. Inventory is not exposed to the peso. The spot rate is $0.0020/peso.

a.What is the value of monetary assets and of monetary liabilities that are exposed to the Chilean peso? What is the value of exposed monetary assets net of exposed monetary liabilities?
b.If the peso depreciates by 10 percent, by how much will monetary assets change in value? By how much will monetary liabilities change in value? What are the r-squares of the relations between change in value and change in the exchange rate?
c.Suppose the exposure of real assets to the Chilean peso is Peso = R,s(R/s), where R,s = - 0.30, R = 0.15, and s = 0.15. If the peso depreciates by 10 percent, by how much are Copper Kettle's real assets likely to change in value? What is the r-square of this relation? Do you have much confidence in this estimate of the change in value? Why or why not?
d.Given your results in parts b and c, by how much is Copper Kettle's equity likely to change in value with a 10 percent depreciation of the Chilean peso?
e.Does Copper Kettle's peso-denominated debt make sense given their operating exposure?

Transcribed Image Text:

Value Value Value Value n pesos in dollars in pesos in dollars Cash (pesos) P20,000,00 Cash (S) Receivables(S) Inventory (S) Current assets Real assets S40,000 Payables (pesos) P100,000,000 S200,000 S40,000 Payables (S) S40,000 S40,000 $240,000 P20,000,000 S40,000 $80,000 $40,000 $400,000 $160,000Current liabilities S240,000 Debt (pesos) Debt (S) Net worth Total assets $400,000 otal liabilities