Problem 26-3 (Purchasing Power Parity): A television set costs $500 in the United States. The same set costs 550 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
Suppose the Federal Reserve Bank of the US unexpectedly raises interest rates in the US. How do you think this will impact the foreign-exchange market?
Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today's spot rate. The firm's financial manager, James Destreumaux, has noted the following current spot and forward rates: U.S.Dollar/Franc Franc/U.S. Dollar Spot 1.6590 0.6028 3
The concept of adequate disclosure continues to be one of the most important issues facing accountants. Disclosure may take various forms. If you should analyze the following: The various forms of disclosure available in published financial statements .The disclosure issues addressed by the: .AICPA's Code of Professional
18. Middle American Corporation (MAC) produces a line of corn silk cosmetics. All of the inputs are purchased domestically and processed at the factory in Des Moines, Iowa. Sales are only in the United States, primarily west of the Mississippi. a. Is there any sense in which MAC is exposed to the risk of foreign exchange rate
7. Chemex, a U.S. maker of specialty chemicals, exports 40 percent of its $600 million in annual sales: 5 percent goes to Canada and 7 percent each to Japan, Britain, Germany, France, and Italy. It incurs all its costs in U.S. dollars, while most of its export sales are priced in the local currency. a. How is Chemex affected
6. Nissan produces a car that sells in Japan for ¥1.8 million. On September 1, the beginning of the model year, the exchange rate is ¥150:$1. Consequently, Nissan sets the U.S. sticker price at $12,000. By October 1, the exchange rate has dropped to ¥125:$1. Nissan is upset because it now receives only $12,000 x 125 = ¥1.5 m
A proposed foreign investment involves a plant whose entire output of 1 million units per annum is to be exported.
2. A proposed foreign investment involves a plant whose entire output of 1 million units per annum is to be exported. With a selling price of $10 per unit, the yearly revenue from this investment equals $10 million. At the present rate of exchange, dollar costs of local production equal $6 per unit. A 10 percent devaluation is e
1. Hilton International is considering investing in a new Swiss hotel. The required initial investment is $1.5 million (or SFr 2.38 million at the current exchange rate of $0.63 = SFr 1). Profits for the first ten years will be reinvested, at which time Hilton will sell out to its partner. Based on projected earnings, Hilton's s
Define exposure, differentiating between accounting and economic exposure. What role does inflation play?
1. Please answer the following questions. a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play? b. Describe at least three circumstances under which economic exposure is likely to exist. c. Of what relevance are the international Fisher effect and purchasing power p
7. In 1990, General Electric acquired Tungsram Ltd., a Hungarian light bulb manufacturer. Hungary's inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary's currency) was devalued 5% and 15%, respectively, during those years. Corresponding inflation for the U.S. was 6.1% in 1990 and 3.1% in 1991. a. What ha
15. Suppose today's exchange rate is $0.62/Euro. The 6-month interest rates on dollars and Euro are 6% and 3%, respectively. The 6-month forward rate is $0.6185. A foreign exchange advisory service has predicted that the Euro will appreciate to $0.64 within six months. a. How would you use forward contracts to profit in the a
1. In May 1988, Walt Disney Productions sold to Japanese investors a 20‑year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6% (the return required by the Japanese investors), was ¥93 billion. Disney took the yen proceeds from the sale, converted them
Swap Agreement. Grant, Inc. is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom.
Swap Agreement. Grant, Inc. is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. It decides to issued dollar-denominated debt (at par value) in t
Consider the following scenario: You have been asked by a local college to write a lecture that explains the gold standard and addresses the functions of the world's major foreign exchange markets. Write a 1050-to 1400-word summary detailing the functions of the world's major foreign currency exchange markets. Be sure to discuss
9. You are an expatriate working for Bank America in Hong Kong, and observe the following prices. Formulate an arbitrage strategy to profit from the situation. ? Swiss Franc per Dollar exchange rate is 1.30 spot and 1.35 for 180-day forward. ? Swiss interest rate is 6.00% compounded daily. ? U.S. stock market index is 1500
Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and export them to other countries. It has no other international business. The subsidiary will produce computers and export them to Caribbean islands and will invoice the products in US dollars. The value of the curr
10. Forecasting with a Forward Rate. Assume that the four-year annualized interest rate in the United States is 9 percent and the fouryear annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate of the Singapore dollar is $.60. If the forward rate
17. Forecasting Based on PPP versus the Forward Rate. You believe that the Singapore dollar's exchange rate movements are mostly attributed to purchasing power parity. Today, the nominal annual interest rate in Singapore is 18%. The nominal annual interest rate in the U.S. is 3%. You expect that annual inflation will be about 4%
At present, LIBOR3 is 7.93% and LIBOR6 is 8.11%. What is the forward rate for a LIBOR3 deposit to be placed in three months?
1. At present, LIBOR3 is 7.93% and LIBOR6 is 8.11%. What is the forward rate for a LIBOR3 deposit to be placed in three months? 2. Company A, a low-rated firm, desires a fixed-rate, long-term loan. A currently has access to floating interest rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in the
Money Exchange - Shown below are exchange rates for several currencies in relation to the U.S. dollar.
Shown below are exchange rates for several currencies in relation to the U.S. dollar. Euro Swiss Franc Mexican Peso Spot rate 0.90 1.70 11.00 30-day forward rate 0.92 1.80 10.95 60-day forward rate 0.93 1.85 10.70 a. Is the euro appreciating or depreciating against the U.S. dollar? Why? b. Is t
Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?
If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five day period?
Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 7.10% 7.50% New Zealand dollar (NZ$) 6.80% 7.25%
1. At present, LIBOR3 is 7.93% and LIBOR6 is 8.11%. What is the forward rate for a LIBOR3 deposit to be placed in three months? 2. Company A, a low-rated firm, desires a fixed-rate, long-term loan. A currently has access to floating interest rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in t
An international pension fund manager uses the concepts of purchasing power parity (PPP) and the international fisher effect (IFE) to forecast spot exchange rates. The pension manager gathers the financial information as follows. Base Price Level 100 Current U.S. Price Level 105 Current South African Price Level 111 Base Ran
1. Rolls-Royce, the British jet engine manufacturer, sells engines to U.S. airlines and buys parts from U.S. companies. Suppose it has accounts receivable of $1.5 billion and accounts payable of $740 million. It also borrowed $600 million. The current spot rate is $1.512/pound. a. What is Rolls-Royce's dollar transaction
1. Suppose the price of gold is 155 marks. a) If the dollar price of gold is $100 per ounce, what should you expect the dollar price of a mark to be? b) If it actually only costs $0.60 to purchase one mark, how could one make arbitrage profits? 2. Fill in the missing exchange rates in the following table: US dollar
Please help with the following problem. Before the Asian crisis, many investors attempted to capitalize on the high interest rates prevailing in the Southeast Asian countries although the level of interest rates primarily reflected expectations of inflation. Explain why investors behaved in this manner. Why does the IFE s
The opening of Russia's market has resulted in a highly volatile Russian currency (the ruble). Russia's inflation has commonly exceeded 20 percent per month. Russian interest rates commonly exceed 150 percent, but this is sometimes less than the annual inflation rate in Russia. a. Explain why the high Russian inflation has pu
1. Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent? 2. Assume that the spot exchange rate of the Singapore dollar is