Question Details

Zemart is a U.S. firm that plans to establish international business 



1. Exposure to Pegged Currency System. Assume that the Mexican peso and the Brazilian currency
(called the “real”) have depreciated against the dollar recently, due to the high inflation rates in
those countries. Assume that inflation in these two countries is expected to continue and that it
will have a major effect on these currencies if they are still allowed to float. Assume that the
government of Brazil decides to peg its currency to the dollar and will definitely maintain the peg
for the next year. Milez Co. is based in Mexico. Its main business is to export supplies from
Mexico to Brazil. It invoices its supplies in Mexican pesos. Its main competition is from firms in
Brazil that produce similar supplies and sell them locally. How will the sales volume of Milez
Co.be affected (if at all) by the Brazilian government- actions? Explain.


2. Assessing Currency Volatility. Zemart is a U.S. firm that plans to establish international business 
in which it will export to Mexico (these exports will be denominated in pesos) and to Canada
(these exports will be denominated in Canadian dollars) once a month and will therefore receive
payments once a month. It is concerned about exchange rate risk. It wants to compare the standard
deviation of exchange rate movements of these 2 currencies against the dollar on a monthly basis.
For this reason, it asks you to:
a. Estimate the standard deviation of the monthly movements in the Canadian dollar against the
U.S. dollar over the last 12 months.
b. Estimate the standard deviation of the monthly movements in the Mexican peso against the
U.S. dollar over the last 12 months.
c. Determine which currency is less volatile.
You can use the oanda.com Web site (or any legitimate Web site that has currency data) to obtain
the end of month direct exchange rate of the peso and the Canadian dollar in order to do your
analysis. Show your work. You can use a calculator or a spreadsheet (like Excel) to do the actual
computations.




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