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CFA Level II Mock Exam B: Morning Session Done reviewing
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Nexran Enterprises Case Scenario Incorrect
Barkley Carlisle was recently hired as an
associate analyst in the corporate finance Correct answer Your answer
department by Nexran Enterprises. Nexran is a A
US manufacturer of heavy industrial equipment
that sells its products globally. Carlisle assists B ✕
finance director Jennifer Brannigan in managing
Nexran’s foreign currency risk. As part of the C
training process concerning the complexities of
the foreign exchange (FX) markets, Brannigan Time Spent:
provides Carlisle with Exhibit 1 and asks him to 8 min 28 sec
demonstrate his familiarity with some
calculations, such as triangular arbitrage and Question Category:
expected future spot rates. A few days later, Economics
Brannigan and Carlisle meet to discuss the
Difficulty Level: Unrated
results of his work.

EXHIBIT 1

INTERBANK CURRENCY
QUOTES AND LIBOR RATES

One
Projected Yea
Currency Bid Offer Spot in Libo
Pair (Spot) (Spot) One Year Rate

USD/CHF 1.0453 1.0456 1.0373 CHF

0.15%

USD/EUR 1.1241 1.1243 1.1324 CAD

0.95%

CAD/NZD 0.8392 0.8396 NZD

2.00%

After reviewing the calculations, Brannigan asks

Carlisle what factors determine the bid–offer
spreads Nexran may face. Carlisle makes the
following statements:

Statement 1: Nexran should receive more

favorable pricing on larger trades.

Statement 2: Nexran should see the best

market liquidity for euro trades when London
opens for trading.

Statement 3: Nexran’s strong credit rating

should enable it to get tighter bid–offer
quotes from dealers.

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The conversation then moves to a discussion of 8

some recent Nexran transactions. Six months  
 
ago, a European customer placed an order for
K EUR 20 million of oil field construction equipment
u with delivery and payment scheduled to take
k place one year later. Nexran hedged all of its
r exposure to the euro by entering into a forward
v position at a forward price of USD1.1716/EUR.
e Nexran has just been informed by the customer
W that because of the collapse in oil prices, it is
canceling the order. Brannigan tells Carlisle to
mark the forward position to market to facilitate
exiting the currency hedge. (Exhibit 2 provides
information about current FX rates and interest
rates.)

EXHIBIT 2

SIX-MONTH FORWARD AND

LIBOR RATES

Points (USD/EUR) 35/36

Libor (EUR) 0.71% (annualized)

Libor (USD) 0.53% (annualized)

The next transaction considered is a recently

signed multiyear contract with a customer
located in the country of Morlundan. Nexran will
sell 25 pieces of equipment per year at a fixed
price, with the sale priced in the Morlundan
pound. Morlundan has a floating exchange rate,
and capital flows are highly mobile. Morlundan
also has an expansionary monetary policy with a
restrictive fiscal policy. Brannigan asks Carlisle to
determine the appropriate action Nexran should
take to manage its Morlundan currency risk
based on that country’s economic policies.

As a final item, Brannigan explains the impact of

the balance of payment flows on exchange rates.
She notes that in recent years, Nexran sold a
sizable portion of its products to the Trundool
Republic, a country that is running large current
account surpluses versus the United States.
Nexran’s sales to the Trundool Republic are
expected to be a major component of the
company’s future total sales. Consequently,
Brannigan believes Nexran should hedge against
a potential decline in the USD relative to the TRD
because she is concerned that the Trundool
Republic may decide to reduce its USD-
denominated assets.

Q. Based on the data in Exhibits 1 and 2, the

mark-to-market value for Nexran’s forward

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position related to the oil field construction 8

equipment order is closest to:  
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K A. USD874,000.
u B. USD877,674.
C. USD871,690.
k
r
Solution
v
C is correct.
e
W 1. Nexran sold EUR20 million forward to the
settlement date at 1.1716 (USD/EUR).
2. To mark the position to market, Nexran
offsets the forward transaction by buying EUR
20 million six months forward to the
settlement date.
3. For the offsetting forward contract, because
the EUR is the base currency in the
USD/EUR quote, buying EUR forward means
paying the offer for both the spot rate and
forward points.

I. The all-in six-month forward rate is

calculated as 1.1243 + 0.0036 = 1.1279
USD/EUR.
II. This rate gives a net cash flow on
settlement day of EUR20,000,000 ×
(1.1716 − 1.1279) USD/EUR = 20,000,000
×0.0437 = USD874,000. (This amount is a
cash inflow because the EUR depreciated
against the USD.)

4. To determine the mark-to-market value of the

original forward position, calculate the present
value of the USD cash inflow using the six-
month USD discount rate: USD874,000/[1 +
0.0053(180/360)] = USD871,690.

A is incorrect because the present value of the

cash flow was not calculated (step 4 of
calculation).

B is incorrect because the cash flow was

calculated using the bid rate instead of the offer
rate.

3. The all-in six-month forward rate = 1.1241 +

0.0035 = 1.1276
4. This gives a net cash flow on settlement day
of 20,000,000EUR× (1.1716 − 1.1276)
USD/EUR = USD880,000, and the present
value is calculated as USD880,000/[1 +
0.0053(180/360)] = USD877,674.

Currency Exchange Rates:

Understanding Equilibrium Value
Learning Outcome
d. Calculate the mark-to-market value of a
forward contract

Discuss 
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Filter  8
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What do you want to discuss...
K
u
k CM a European customer placed an order for EUR 20 million of oil field construction equipment
r with delivery and payment scheduled to take place one year later.
v we have future revenue in euro and need to translate it into $. if one year later the euro
depreciates, we have fewer $ translated. so we have to hedge to avoid future loss.
e
to hedge, we sold 20m euro 1-year forward contract to someone, once received the 20m
W
from the customer, can close forward contract. (20m*1.1716)
the customer canceled the order, we will not receive the order so buy euro to fulfil the
contract. now have to buy 6-m contract by itself. rate at 1.1243+0.36%=1.1279
the difference will be 20m*(1.1279-1.1716)=87400
because the execution of forward contracts happens in 6months later, so we discount them
to have PV.
87400/(1+0.53%*180/360)=87169 use USD libor coz finally it is USD inflows

Created 3 hours ago by Chuanqi Ma 0 replies | Last activity: 3 hours ago

Reply to this Comment

ZY The customer wants to pay 20M EUR to the company for oil field equipment. The company is
US based and needs to convert the EUR to USD, so it sold a forward contract (EUR is the
base current) in order to convert, which means in 6 months, the Company will deliver EUR of
20M to a 3rd party who bought the forward contract. However, because the customer
cancels its order, the Company will not receive 20M EUR in 6 months, it needs to buy 20M
EUR from the dealer in order to execute the forward contract it originally sold to a 3rd party.
Buy 20M EUR using the offer price adjusted by the forward points. Calculate the difference in
Forex rates and convert back the different using US Libor.

Created 6 days ago by Zonghan Yang 3 replies | Last activity: 10 hours ago
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DD how do I calculate the 1.1243?

Created 17 hours ago by DIONE DURHAM 2 replies | Last activity: 14 hours ago
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MA I just want to make sure my logic is correct: because i am a US based company and I'm
receiving EUR, it means my offsetting position would be to sell EUR (which means I'm
buying USD).. I'm using the USD/EUR rate because i am a US company and also because
thats the currency i want the answer to be in is USD.

Is my logic correct? thanks in advance.

Created a day ago by Mohamed Al Rahma 1 reply | Last activity: 21 hours ago
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HZ Hey, this may seem ignorant. But how do you know Naxran takes a short position in the
forward contract not long?

Created 3 days ago by Huiming Zhang 3 replies | Last activity: a day ago
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DN My tip: Whenever confused with bid/ask quote, choose the one that makes you have less
money.

Created 2 days ago by Duc Nguyen 1 reply | Last activity: 2 days ago
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8
NL Need to use exhibit 1...rather than adding 0.0036 to 1.1716  
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K Created 2 days ago by Nan Lin 0 replies | Last activity: 2 days ago
u Reply to this Comment
k
r yes its a
AA
v nice question
e
Created 2 days ago by Ayush Agarwal 0 replies | Last activity: 2 days ago
W
Reply to this Comment

S. Can someone pls explain me why the euro was sold . I was confused with the positions
taken within this question..

Created 6 days ago by SIDRA-TUL-MUNTAHA . 2 replies | Last activity: 3 days ago

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QH Nexran is a US company. So it needs to trasfer EUR to USD in six month. To mark to market,
they must hedge this transaction, so they bur EUR against USD.

Created 5 days ago by Qing Huang 3 replies | Last activity: 4 days ago
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