FIN 535 Week 4 Homework Assignment
1. Chapter 6. Questions and Applications 13 Eects of Indirect Intervention Suppose that the government of Chile reduces one of its key interest rates. The values of several other Latin American cur- rencies are expected to change substantially against the Chilean peso in response to the news. a. Explain why other Latin American currencies could be affected by a cut in Chile- interest rates. b. How would the central banks of other Latin American countries be likely to adjust their interest rates? How would the currencies of these countries respond to the central bank intervention? c. How would a U.S. firm that exports products to Latin American countries be affected by the central bank intervention? (Assume the exports are denomi- nated in the corresponding Latin American currency for each country.)
2. Chapter 6. Questions and Applications: 18 (page 212). 18. Intervention Effects on Corporate Performance Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your sub- sidiary purchases all of its materials from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent $100,000 in interest each month. Australia has just raised its interest rate in order to boost the value of its currency (Australian dollar, A$). The Australian dollar appreciates against the U.S. dollar as a result. Explain whether these actions would increase, reduce, or have no effect on: a. The volume of your subsidiary- sales in Australia (measured in A$). b. The cost to your subsidiary of purchasing materials (measured in A$). c. The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A$). Briefly explain each answer.
3. Chapter 7. Questions and Applications: 7 (page 247). 7. Covered Interest Arbitrage Assume the following information: Spot rate of Mexican peso $.100 180-day forward rate of Mexican peso $.098 180-day Mexican interest rate 6% 180-day U.S. interest rate 5% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer.
4. Chapter 7. Questions and Applications: 32 (page 249). 32. Triangular Arbitrage You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for .9 euros. The bank will pay you .8 euros for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The bank will pay you 9 pesos for a U.S. dollar. You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the trans- actions that you would execute and the profit that you would earn. If you cannot earn a profit from triangular arbitrage, explain why.
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