Question 1) Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 2 million Mexican pesos (MXP) in revenue at the end of the next year. However, it might also receive a contract to provide this technology to the Mexican government. In this case, it will generate a total of MXP4 million at the end of the next year. It will not know whether it will receive the government order until the end of the year.

Today's spot rate of the peso is $0.13. The one-year forward rate is $0.11. Blustream expects that the spot rate of the peso will be $0.12 one year from now. The only initial outlay will be $150,000 to cover development expenses (regardless of whether the Mexican government purchases the technology). Blustream will pursue the project only if it can satisfy its required rate of return of 20 percent. Ignore possible tax effects. It decides to hedge the maximum amount of revenue that it will receive from the project.

A) Determine the NPV if Blustream receives the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

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B) If Blustream does not receive the contract, it will have hedged more than it needed to and will offset the excess forward sales by purchasing pesos in the spot market at the time the forward sale is executed. Determine the NPV of the project assuming that Blustream does not receive the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

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C) Now consider an alternative strategy in which Blustream only hedges the minimum peso revenue that it will receive. In this case, any revenue due to the government contract would not be hedged. Determine the NPV based on this alternative strategy and assume that Blustream receives the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

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D) If Blustream uses the alternative strategy of only hedging the minimum peso revenue that it will receive, determine the NPV assuming that it does not receive the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

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E) If there is a 50 percent chance that Blustream will receive the government contract, would you advise Blustream to hedge the maximum amount or the minimum amount of revenue that it may receive? Explain.

It should hedge the -Select-minimummaximumItem 5 amount of revenue, since the NPV for either scenario is -Select-lowerhigherItem 6 .

F) Blustream recognizes that it is exposed to exchange rate risk whether it hedges the minimum amount or the maximum amount of revenue it will receive. It considers a new strategy of hedging the minimum amount it will receive with a forward contract and hedging the additional revenue it might receive with a put option on Mexican pesos. The one-year put option has an exercise price of $0.115 and a premium of $0.008. Determine the NPV if Blustream uses this strategy and receives the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

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E) Also, determine the NPV if Blustream uses this strategy and does not receive the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

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G) Given that there is a 50 percent probability that Blustream will receive the government contract, would you use this new strategy or the strategy that you selected in question (e)?

It is better to use the strategy offered in the -Select-question (e)question (f)Item 9 since it results in greater amount of NPV for both scenarios.

Question 2: Cantoon Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $4 million. It will reinvest all the earnings in the unit. It expects that at the end of nine years, it will sell the unit for 12 million euros after capital gains taxes are paid. The spot rate of the euro is $1.20 and is used as the forecast of the euro in the future years. Cantoon has no plans to hedge its exposure to exchange rate risk. The annualized U.S. risk-free interest rate is 4 percent regardless of the maturity of the debt, and the annualized risk-free interest rate on euros is 7 percent, regardless of the maturity of the debt. Assume that interest rate parity exists. Cantoon's cost of capital is 22 percent. It plans to use cash to make the acquisition.

a) Determine the NPV under these conditions. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

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b) Rather than use all cash, Cantoon could partially finance the acquisition. It could obtain a loan of 3 million euros today that would be used to cover a portion of the acquisition. In this case, it would have to pay a lump-sum total of 6 million euros at the end of nine years to repay the loan. There are no interest payments on this debt. This financing deal is structured such that none of the payment is tax deductible. Determine the NPV if Cantoon uses the forward rate instead of the spot rate to forecast the future spot rate of the euro and elects to partially finance the acquisition. You need to derive the nine-year forward rate for this question. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

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