Individual project:900–1,100 words Navigation Systems Inc. now has total worldwide revenues of over $500 million forecast for this coming year. You have operations in the United States of $300 million...

Individual project:900–1,100 words Navigation Systems Inc. now has total worldwide revenues
of over $500 million forecast for this coming year. You have operations in the United States of
$300 million with a 10% ROS (return on sales, which is the same as net income on an income
statement); operations in Germany of €100 million with anROSof 12%; and operations in
Shanghai, China of 650 million Yuan with an ROS of 8%. You expect to repatriate all the ROS
to the United States when available in 12 months. At your supervisor's request, do the following:
Determine the spot and 12-month forward exchange rates, and determine any change in the ROS
repatriated in 12 months based on exchange rates versus the current forecast. Describe the
repatriation using each of the following: a spot transaction an outright forward a foreign-
exchange swap Would there be any use or benefit in using a currency option or currency
swaption? Describe each. Be sure to consider any U.S. corporate taxes that may be due and also
whether there are any tax holidays in effect that may alter the taxes due on repatriation of the
profits. How would you advise the company to handle the repatriation?
Solution:
1. http://www.fxstreet.com/technical/currencies-glance/pair.aspx?id=USD/CNY
Use this place to get the forward rate for USD-CNY.
Today it is 6.83
1 year later 6.87
http://www.fxstreet.com/technical/currencies-glance/pair.aspx?id=EUR/USD
Use this place to get the forward rate for EUR-USD.
Today it is 1.4039
1 year later 1.57
In Germany we have
Sales: 200 million Euros
Return on Sales: 11%, or 22 million Euros
In China we have
Sales: 990 million Yuan
Return on Sales: 9%, or 89.1 million Yuan
In the US we have
Sales: $450 million
Return on Sales: 12%, or $54 million
Today 22 million Euros is worth $30.8 million (22*1.4039)
One year later: $34.54 million (22*1.57)
Today 89.1 million Yuan is worth $13.045 million (89.1/6.83)
One year later: $12.969 million (89.1/6.87)
Total sales in USD: $(450+281+145) = $876 million (Using today's exchange rate)
Return today $97.845 million, or 11.16%
Return one year later is $101.509 million (if the forward rates turn out to be true), or 11.58%
2. Spot transaction: A foreign exchange transaction in which each party promises to pay a certain
amount of currency to...