Exam 27: Managing International Risks

When a currency gets stronger, the forward rate of that currency must have increased against all currencies.

The Mexican economy is predicted to average double-digit inflation over the next two years at 10 percent per year. The inflation forecast for the United States for the same period is 4 percent per year. If the current exchange rate is $0.091/peso, what is the expected exchange rate two years from now?

Your U.S.-based firm is deciding between using currency futures contracts or a forward contract with its commercial bank in order to hedge a scheduled dividend from its subsidiary corporation in Germany. The dividend will be repatriated in July, while the currency futures contracts are only available for June or September delivery. Which of the following choices properly hedges the transaction without basis risk?

Suppose that the G Company knows that in one month it must pay £7 million for goods that its U.S. subsidiary will receive in Britain. The current exchange rate is $1.99£. The risk that the corporate treasurer faces is that

When estimating the cash flows and NPV for a foreign project, there is no need to forecast exchange rates for the life of the project.

One can describe a currency forward contract as

In general, the countries with the highest interest rates also have the highest inflation rates.

The spot USD/GBP exchange rate is USD1.99/GBP. What is the indirect quote?

Purchasing power parity provides a better long-run indicator for future price changes than short-run indicator.

The Big Mac exchange rate matches official exchange rate quotes for different currencies.

Briefly describe the different types of currency markets.

The true cost of hedging foreign currency risk is the difference between the forward rate and the expected spot rate.

What is wrong with the following news report? "Today the dollar ended the trading session stronger."

If a Big Mac costs $2.31 in the United States, and in Japan 250 yen, according to PPP, what is the implied exchange rate in yen/$US?

The current spot rate is GBP 0.5024/USD. The three-month forward rate is GBP 0.5040/USD. The TE Company expects a payment of GBP 100 million in three months. If the firm hedges this transaction in the forward market, what is the USD amount it will receive in three months?

The current spot rate is $US0.8543/$A. The one-year forward rate is $US0.8475/$A. A U.S. exporter denominates its exports to Australia in $A and expects to receive $A600,000 in one year. What is the value of these exports in one year in $US given that the firm executes a forward hedge?

Briefly explain the expectations theory of forward exchange rates.

The spot GBP/USD exchange rate is 0.5025/USD, and the one-year forward rate is GBP 0.5048/USD. If the annual interest rate on dollar CDs is 6 percent, what would you expect the annual interest to be on GBP CDs?

An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions)are as follows: Year 0, −100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.60/$A. Calculate the NPV of the project in $US.

Assume that both the law of one price and the expectations theory of forward rates hold. The spot rate for the Ruritanean doubloon is 0.455 doubloon/$, and the one-year forward rate is 0.476 doubloon/$. Suppose that next year's forecasted rate of inflation in Ruritania is now revised upward by 10 percent. How does this affect exchange rates?