IBUS 618 Week 4 Assignment Help

IBUS 618 Week 4 Assignment Help | KSBAU

Foreign Exchange (FOREX) Problem-Solution Set – Student Analysis

First read the problem, study the solution, and then write your analysis of the problem-solution by doing the following:

1)     Give a similar example to show mastery of the concept

2)     Discuss what you learned or how you would apply the concept

3)     Consider if is there an alternative way to look at the problem

FIRST PROBLEM

Problem: You have an accounts payable to a German exporter for 100 Porsche Cayenne SUVs.  The seller offers a 2 percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30).  Today the exchange rate is $1.40 per Euro.  You notice that the 30 day forward rate for the $/Euro is $1.38.  What should you do?  You owe 70,000 Euros for each of the cars (before any discounts).  [Show your work, and analysis.]

SECOND PROBLEM

Problem: Calculate the exchange rate for dollars per SDR using exchange rates for the most recent day that you have exchange rate data. Show work, and analysis.

THIRD PROBLEM

Problem: You are changing planes in London for a flight to Paris where you will connect with your flight to Cape town.  You are picking up reading material for the flight and are looking at the prices listed on The Economist magazine which conveniently lists prices in several currencies.  You note that the price in Pounds is 2.40 pounds and the price in Euros is 2 Euros.  The exchange rate for the dollar (your credit card was issued in the USA) is $1.59/pound and $1.3837/euro.  Should you buy reading materials now or wait until you’re in Paris? 

FOURTH PROBLEM

Taking advantage of the “carry trade”

Example:       Spot rate = 9.5 pesos/$                    Forward Rate = 10 pesos/$

You have $1,000,000.

Interest Rates:

Can you make money off of this?  What are the effects of covered interest arbitrage?

Calculation of % premium or discount.  Premium or discount size should be equal to but opposite in sign to interest rate difference.

[(Fwd – Spot)/Spot] X 12/n X 100 = % premium or discount

Use this formula with direct rates that are units of local currency per one unit of foreign.  Indirect rates are units of foreign currency per one unit of local currency.  Be careful for this is a common mistake on exams.

FIFTH PROBLEM

You have $1,000,000 to start with.  Here are the facts:

Yen Spot Rate = 106 Yen/$

Yen Fwd Rate = 103.5 Yen/$

(6 months)

Interest Rates in Japan are 4% per annum (2% for 6 months).

Interest Rates in the USA are 8% per annum (4% for 6 months)for securities of similar risk and maturity.

What should you do?