COLLEGE OF BUSINESS, HOSPITALITY AND TOURISM STUDIES

DEPARTMENT OF ECONOMICS, CUSTOMS, BANKING & FINANCE

FIN 601: CORPORATE FINANCE

TRIMESTER 2, 2012
TUTORIAL 7 SOLUTIONS
1. An Australian exporter decides to hedge receivables in USD. Accordingly, it buys 10
Sydney Futures Exchange (SFE) June AUD futures contracts at 0.6410. The
exporter uses about AUD $100 000 to fund each of his play. In early June, it decides
to reverse its position in the futures market by selling 10 contracts at 0.6620. How
much has the exporter gained or lost on the futures trade? Explain what these prices
indicate about the movement of the physical exchange rate.
Firstly exporter buys USD per contract
AUD 1
=
USD 0.6410
AUD 100 000
=
USD 64 100
Secondly exporter sells for USD per contract
AUD 1
=
USD 0.6620
AUD 100 000
=
USD 66 200
Gain $66200 - $ 64100 = $US2 100 per contract x 10 contracts = $21 000
Value USD decreases; value AUD increases
Reduction in amount of AUD gained in physical exchange.
Loss on physical = gain on futures.

2. David Pride Fashions has an overdraft account at its bank with a limit of $100 000.
Interest is charged at the rate of 11.25% p.a. on daily balance, debited monthly. The
balance remains at $26 833.25 O/D for 7 days and then falls to $55 800.02 O/D for
the remaining 23 days in the month. What is the monthly interest expense?
$26 833.25 0.1125/365 7 = $57.89
$55 800.02 .1125/365 23 = $395.57
Total = $453.46
3. Ace Discounters buy $600 000 of invoices for a 4.3% fee. Ace collects 90% of the
debts in 30 days and 10% in 61 days. If funds cost Ace 6.0% p.a. and assuming the
costs of collecting the debts amount to 2% of face value per month for debts
collected within 30 days and 3% of face value per month for debts collected within 2
months. Was this deal worth doing for Ace? Why? How could Ace manage a better
outcome?

Revenue: .043 600 000 = $25 800

90 % of $600 000 = $540 000
10 % of $600 000 = $60 000
Costs: interest: $540 000 x 0.06/12 x 1 = $2700
$60 000 x 0.06/12 x 2 = $600
Total interest= $3300.
Costs of Collection: $540 000 x 0.02 = $10 800
$60 000 x 0.03 x 2 = $3 600
Total = $14 400
Total cost: 3300 +14 400 = $17 700.
Yes, a (25 800 -17 700) $8100 surplus.
Faster collection would reduce interest costs and probably collection costs.
4. Fifi Fashions (FF) imports high quality womens clothing from Italy into Australia.
FF needs about $1 000 000 in 2 months time (in December) to pay for winter stock.
The manager of FF is sure that interest rates will start to rise soon and wants to lock
in the price of 90-day funds; she sells a December 90 day BAB (Banks Accepted
Commercial Bills) futures quoted at 93.90. Instead of taking delivery, she reverses
her position at 94.50. She then issues BABs for $1 000 000 and raises funds in the
money market at a yield of 5.6%.
(a) What is her gain or loss on the futures trading?
(b) How much funds does she get from the Physical market?

(a) Sells for: 1 000 000 / [1+ (100-93.90)/100 * 90/365] =

$985 181.79
Buys at: 1 000 000 / [1+ (100-94.50)/100 * 90/365] = $986 619.81
Loss
$1 438.02
(b) Receives : 1 000 000 / [1+(5.6/100 * 90/365)]
Less loss
Actual received on hand

$986 379.85
=
$1 438.02
=
$984 941.83

5. Barnacle Boats needs about $1 million in 60 days time to pay a contracted deposit
on a new boat that is being built for them. Barnacle needs the funds for 90 days,
until the revenue from the sale of other boats is received. Barnacles bank quotes
6.25% for a 2:5 FRA and agrees also to provide the funds at market price when
supplied. At settlement, the interest rate in the market has fallen to 6%. What is the
gain/loss on the settlement figure for Barnacle?
Receives: 1 000 000 / [1+(6.25/100 * 90/365)]
Pays: 1 000 000 / [1+(6/100 * 90/365)]
Loss

=
=
=

$984 822.93
$985 421.17
$598.24

Market rate has fallen so borrower pays lender.