Need answer today (4/13)
1. Exchange Rates. Use Table 23?1 to answer these questions:
a. How many euros can you buy for $100? How many dollars can you buy for 100 euros?
b. How many Swiss francs can you buy for $100? How many dollars can
you buy for 100 Swiss francs?
c. If the euro depreciates with respect to the dollar, will the direct
exchange rate quoted in Table 23?1 increase or decrease? What about
the indirect exchange rate?
d. Is a United States or an Australian dollar worth more?
2. Exchange Rate Relationships. Look at Table 23?1.
a. How many Japanese yen do you get for your dollar?
b. What is the 1-year forward rate for the yen?
c. Is the yen at a forward discount or premium on the dollar?
d. Calculate the annual percentage discount or premium on the yen.
e. If the interest rate on dollars is 6.5 percent, what do you think
is the interest rate on yen?
f. According to the expectations theory, what is the expected spot
rate for the yen in 1 year?s time?
g. According to purchasing power parity, what is the expected
difference in the rate of price inflation in the United States and
Japan?
3. Exchange Rate Relationships. Define each of the following theories
in a sentence or simple equation:
a. Interest rate parity theory.
b. Expectations theory of forward rates.
c. Law of one price.
d. International Fisher effect (relationship between interest rates in
different countries).
4. International Capital Budgeting. Which of the following items do
you need if you do all your capital budgeting calculations in your own
currency?
Forecasts of future exchange rates
Forecasts of the foreign inflation rate
Forecasts of the domestic inflation rate
Foreign interest rates
Domestic interest rates
5. Foreign Currency Management. Ms. Rosetta Stone, the treasurer of
International Reprints,
Inc, has noticed that the interest rate in Japan is below the rates in
most other countries. She is therefore suggesting that the company
should make an issue of Japanese yen bonds. What considerations ought
she first take into account?
6. Hedging Exchange Rate Risk. An importer in the United States is due
to take delivery of silk scarves from Europe in 6 months. The price is
fixed in euros. Which of the following transactions could eliminate
the importer?s exchange risk?
a. Buy euros forward.
b. Sell euros forward.
c. Borrow euros, buy dollars at the spot exchange rate.
d. Sell euros at the spot exchange rate, lend dollars.
Risk Management. Large businesses spend millions of dollars annually
on insurance. Why?
Should they insure against all risks or does insurance make more sense
for some risks than others?
Table 23-1:
Forward Rate
Spot Rate 3 Months 1 Year
Europe
EMU (euro) .9644 .9605 .9503
Sweden (krona) 9.3924 9.4554 9.6239
Switzerland (franc) 1.5231 1.5206 1.5143
U.K. (pound) 1.4994 1.491 1.4658
Americas
Canada (dollar) 1.5331 1.5372 1.5502
Mexico (peso) 9.7550 9.91 10.39
Asia/Paci?c/Africa
Australia (dollar) 1.7518 1.7657 1.8066
Hong Kong (dollar) 7.8000 7.7993 7.8021
Japan (yen) 123.380 122.81 120.63
Philippines (peso) 50.2450 50.686 52.825
South Africa (rand) 10.2787 10.5532 11.3212 |
