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Chapter 21

Q. 21.FSE.13

Assume that a euro is equal to $1.00 today. A U.S. firm could engage in a parallel loan today in which it borrows 1 million euros from a firm in Belgium and provides a $1 million loan to the Belgian firm. The loans will be repaid in one year with interest. Which of the following U.S. firms could most effectively use this parallel loan in order to reduce its exposure to exchange rate risk? (Assume that these U.S. firms have no other international business than what is described here.) Explain.
Sacramento Co. will receive a payment of 1 million euros from a French company in one year.
Stanislaus Co. needs to make a payment of 1 million euros to a German supplier in one year.
Los Angelus Co. will receive 1 million euros from the Netherlands government in one year. It just engaged in a forward contract in which it sold 1 million euros one year forward.
San Mateo Co. will receive a payment of 1 million euros today and will owe a supplier 1 million euros in one year.
San Francisco Co. will make a payment of 1 million euros to a firm in Spain today and will receive $1 million from a firm in Spain for some consulting work in one year.

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Verified Solution

Sacramento could benefit from the parallel loan because its receivables in one year could be used to pay off the loan principal in euros.