Question Details

7. Multinational Corportions[LO3] Given that many multinationals based in many countrieshave much greater sales outside thier dormestic currency?

1.       Using the Cross-Rate [LO1] Use the information in Figure 21.1 to answer the following questions:

a.       Which would you rather have, $100 or £100 ? Why?

b.       Which would you rather have, 100 Swiss francs (SF) or £100? Why?

c.        What is the cross-rate for Swiss francs in terms of British pounds? For British pounds in terms of Swiss francs?

2.       Forward Exchange Rates [LO1] Use the information in Figure 21.1 to answer the following questions:

a.       What is the six-month forward rate for the Japenese yen in yen per U.S dollar? Is the yen selling at a premium or a discount? Explain.

b.       What is the three-month forward rate for Canadian dollars  in U.S dollars per Canadian dollar? Is the dollar selling at a premium or a discount? Explain.

c.        What do you think will happen to the value of the dollar relative to the yen and the Canadian dollar, based on the information in the figure? Explain.

3.       Using Spot and Forward Exchange Rates [LO1] Suppose the spot exchange rate for the Canadian dollar is Can$1.05 and the six-month forward rate is Can$1.07.

a.       Which is worth more, a U.S dollar or a Canadian dollar?

b.       Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$2.50? Why might the beer actually sell at a different price in the United States?

c.        Is the U.S dollar selling at a premium or a discount relative to the Canadian dollar?

d.       Which currency is expected to appreciate in value?

e.        Which country do you think has higher interest rates- the United States or Canada? Explain.

4.       Cross-Rates and Arbitrage [LO1] Suppose the Japanese yen exchange rate is ¥80=$1, and the British pound exchange rate is £1= $1.58.

a.       What is the cross-rate in terms of yen per pound?

b.       Suppose the cross-rate is ¥129= £1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing and the potential arbitrage profit.

5.       Interest Rate Parity [LO2] Use Figure 21.1 to answer the following questions: Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.4 percent. What must the six-month risk-free rate be in Great Britain? In Japan? In Switerzland?

6.       Interest Rates and Arbitrage [LO2] The treasurer of a major U.S firm has $30 million to invest for three months. The interest rate in the United States is 0.24 percent per month. The interest rate in Great Britain is 0.29 percent per month. The spot exchange rate is £0.631, and the three-month forward rate is £0.633. Ignoring transaction costs, in which country would the treasurer want to invest the company’s funds? Why?

7.       Inflation and Exchange Rates [LO2] Suppose the current exchange rate for the Polish zloty is Z 2.86. The expected exchange rate in three years is Z2.94. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rate is constant for both countries. What relationship are you relying on in answering?

8.       Exchange Rate Risk [LO3]Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 21.1 You have just placed an order for 30,000 motherboards at a cost to you of 233.5 Singapore dollars each. You will pay for the shipment when it arrives in 90 days. You can sell the motherboards for $195 each. Calculate your profit if the exchange rate goes up or down by 10 percent over the next 90 days. What is the break-even exchange rate? What percentage rise or fall does this represent in terms of the Singapore dollar versus the U.S dollar?

9.       Exchange Rates and Arbitrage [LO2]Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.78 and Kr 5.86, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate in Norway is 5.7 percent.

a.       Is there an arbitrage opportunity here? If so, how would you exploit it?

b.       What must be the six-month forward rate be to prevent arbitrage?

10.    The International Fischer Effect [LO2] You observe that the inflation rate in the United States is 2.6 percent per year and that T-bills currently yield 3.4 percent annually. What do you estimate the inflation rate to be in:

a.       Australia, if short-term Australian government securities yield 4 percent per year?

b.       Canada, if short-term Canadian government securities yield 7 percent per year?

c.        Taiwan, if short-term Taiwanese government securities yield 9 percent per year?

11.    Spot versus Forward Rates [LO1] Suppose the spot and three-month forward rates for the yen are ¥79.12 and ¥78.64, respectively.

a.       Is the yen expected to get stronger or weaker?

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