Assignment:
The Swift Corporation is a California-based company with 5,000 sales representatives and employees who drive company cars. Management has chosen to insure earthquake risk with a policy that covers $10 million in business and personal property and now they are considering how to cover workers compensation risk.
a. Management wants an opinion about using retention for its worker compensation risk. Make a case in favor of using retention.
b. A sensitivity analysis was done last year by Swift previous consulting firm showing the sensitivity of the firm operating income to changes in disposable income (which is total income minus taxes). The result obtained from the sensitivity analysis was that the elasticity with respect to disposable income is 0.70. Swift never received an explanation on the meaning of this number from the other consulting firm. How would you explain the meaning of the elasticity measure to Swift management? In your explanation use the assumption that disposable income is estimated to grow next year by 5%.
c. Swift has established a college scholarship fund for the children of its employees. Six months ago, management decided to use $1million of the company profit to purchase 1-year Australian bonds with a stated return of 20%. The exchange rate of Australian dollar for U.S. dollars at the time that the bonds were purchased was 0.78. The bonds are currently unhedged. What is the foreign exchange exposure for the company on these bonds?