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Foreign Exchange and Derivatives

Analyze the impact of the foreign exchange and derivatives markets on Honeywell Inc. and the countries (India and Brazil)in which the Honeywell Inc. is considering expansion. Specifically, describe the impact of exchange rate convertibility, bid-ask spreads, real exchange rates, and the interest rate parity on the relative investment attractiveness of the two countries in your scenario. Be sure to answer the following questions in your paper:

a.Does Purchasing Power Parity (PPP) hold? What is the significance of this?

b.What happened to the value of the real exchange rate over time? What is the significance of this change in value?

Be sure to properly cite the source(s) of the data that you used for your calculations. If you used an electronic source, include the URL. If you used a printed source please attach a copy of the data to your paper.

Solution Preview

Foreign Exchange and Derivatives

Exchange rate is always an important factor for multinational countries. It generally represents the national currency quotation in respect to foreign currency. As we know the exchange is exposed to the demand and supply of currency, so for Honeywell Inc it's very important to understand the nature of exchange rate in the countries (India and Brazil) before its expansion in theses countries.
If we look at India, the country has its currency called INR (Indian Rupees). Convertibility in current account along with trade liberalization measures has increased the competitiveness in the domestic market
As we know that the rupee convertibility process started and then implemented since July 1991, by involving several important factors that includes:
• The country set relaxation of Quantitative Restrictions Regime that involves the import quotas and licensing.
• It has reduced the level and dispersions of import tariff rates
• The country has eliminated several export subsidization schemes;
• Adopted the liberalization of exchange restrictions on capital ...

Solution Summary

The expert analyzes the impact of the foreign exchange and derivatives markets on Honeywell Inc. Whether the purchasing power parity (PPP) holds is determined.

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