Question

Suppose that McDonald’s overseas sales revenue in Europe totaled €100.00 billions in 2018 and is predicted to grow to €105.50 billions in 2019. The spot exchange rate was $1.20 per euro in 2018 and is predicted to be $1.10 per euro by the end of 2019.

Suppose that the forward exchange rate is quoted currently at $1.15 per euro. Suppose that McDonald’s management is risk averse and is pretty much unsure about the end-of-year dollar/euro exchange rate. If McDonald hedges the foreign exchange risk by entering a forward-exchange contract based on the currently quoted forward exchange rate, the predicted growth rate of McDonald’s overseas dollar-denominated revenue is about __________.

A) 1.10% B) 2.20% C) -0.05% D) none of the above

7. To hedge the foreign exchange risk as described in question 6, McDonald management should enter a forward contract in ________ to sell _________ for ________ to be delivered in 2019.

A) 2018; €105.50 billions; $121.325 billions. B) 2018; $121.325 billions; €105.50 billions. C) 2019; €105.50 billions; $121.325 billions. D) 2019; $121.325 billions; €105.50 billions

Answer 1

A)

That is revenue in dollar becomes 101.10% of revenue in 2018. Therefore, there is a 1.1% increase

Option A

B)

McDonalds should enter into the contract now. That is the contract should be in 2018.

McDonalds will want to sell Euros in 2019 in exchange of dollars. The expected quantity of Euro to be sold in 2019 is 105.50 billion. The contractual rate is $1.15 per euro. Therefore, 105.5bn Euro would fetch 105.5x1.15 = 121.325bn dollars.

Hence, Option A