International Financial Management Final Exam

International Financial Management 

Final Exam

 (110 points)

Constellation Brands, Inc. (NYSE: STZ) is the world’s largest wine company by volume, operates over 30 wineries, and has sales in 125 countries totaling over $4 billion, and operates 30 wineries.  Headquartered in the US, it also has offices in Canada and New Zealand, and its portfolio of wines includes popular brands such as Clos Du Bois  in the U.S, and Kim Crawford in New Zealand.  There are 2 multi-part questions below in which you are asked to analyze factors affecting Constellation.

1)    (56 points) Constellation Brands has foreign exchange exposure as a result of its international business.   In New Zealand, Constellation faces costs associated with the operation of its New Zealand wineries and its New Zealand office in Auckland, and it also receives New Zealand dollars from its sales within New Zealand.  In Europe over the next three months, Constellation Brands faces foreign currency costs arising from recent investment into a new winery in Spain, and also as a result of its marketing and distribution costs necessary for the promotion and sale of its products in Europe. 

Assume today is November 1, 2014, and suppose Constellation Brands (CB) is projecting the following New Zealand dollar (NZD) and Euro costs and revenues (after-tax cash flows) will occur three months from November 1, 2014 (i.e. receivable & payables due on February 1, 2015):

Projections:

Country    Expected Outflows on Feb 1, 2015 Expected Inflows on Feb 1, 2015

Euro Area             euro 5 million                         Euro 2.75 million

New Zealand        NZD 16.25 million                NZD 22 million

The company is concerned about its net exposurein each of these currencies in 2015, and is considering ways to hedge its risk. 

Suppose it obtains the following quoted prices and rates on Nov 1, 2014, and use this information to answer the questions below:

Money market rates (all rates are % on annual basis) as of Nov 1, 2014:

                                              Deposit                      Lending

3-month NZD                                 3.6                              3.8

3-month U.S. $                      0.4                              0.6

3-month euro                         0.25                            0.45

Spot & Forward (on 11/1):   Bank’s Bid                 Bank’s Ask

Spot NZD/$ rate                   NZD 1.2656/$                       NZD 1.2660/$

3-month NZD/$ forward      NZD 1.2750/$                       NZD 1.2756/$                                  

          

Spot $/euro                            $1.2525/euro              $1.2528/euro

3-month $/euro forward        $1.2542/euro              $1.2555/euro

.    Spot NZD/euro                                  NZD 1.5852/euro      NZD 1.5860/euro

3-month NZD/euro forward NZD 1.5991/euro      ? (solve in part a)

a)     (6 points) Given the quotes above, what should be the Bank Ask quote for the 3-month NZD/euro forward exchange rate if triangular arbitrage has eliminated profit opportunities?  Using the Ask spot NZD/euro rate the Ask NZD/euro forward quote you just calculated, what is the annualized forward premium or discount for the NZD vs. the Euro and which currency is at a forward discount?  

b)    (8 points) Suppose the financial officer at Constellation’s New Zealand office considers investing the subsidiary’s NZD 1,000,000 cash funds over the next 3 months in either New Zealand or the US.  Given the quotes on the previous page, does covered interest rate parity hold between New Zealand and the US?  If not, where should the officer invest the funds, and how would such a profit opportunity tend to impact the Spot (NZD/$) exchange rate quote? Be sure to show your work. 

c)     (6 points) Suppose a New Zealand bank trader notice the interest rate differential between New Zealand and Europe, and considers pursuing a carry trade strategy over the next three months.  What position would the trader take in each currency? For what range of future NZD/euro spot rates (3 months from now) will the carry trade strategy be profitable?

d)    (8 points) Suppose Constellation would like to know what its costs or receipts would be as of Feb 1, 2015 if it were to hedge its net Euro position usingmoney market hedge (consider only the Euro).  Using the quotes on p.2, what would Constellation pay or receive on its net Euro cash flows on Feb 1, 2015if it hedged its risk with a money market hedge on Nov.1?

e)     (10 points) Next suppose Constellation Brands decides to consider hedging its New Zealand position coming due on Feb 1, 2015 using a March’15 futures contracts (consider only the New Zealand dollar position). One futures contract is worth NZD100,000, and that one cannot go long or short fractions of this contract.  The firm obtains the following futures price on Nov 1, 2014: