BRILLIANT ANSWER

Part two is a continuation of the project. Answer the following questions concerning your MNC identified in Part 1.

Using Currency Futures and Options

1. How can you use currency futures to hedge the exchange rate risk of your MNC? 

2. How can you use currency options to hedge the exchange rate risk of your MNC?

Accessing Futures Quotes 

Go to a web site that provides quotations for currency futures. Determine the prevailing futures price of the main foreign currency for your business. Go to a web site that provides exchange rate quotations and determine the prevailing spot rate. What is the discount or premium of the futures price?

Monitoring Central Bank Intervention

1. How can your business be affected if the Fed attempts to strengthen the dollar in the foreign exchange market? 

2. If the Fed decides to weaken the dollar, how will your business be affected? 

3. How can indirect central bank intervention affect your business even if there is no impact on exchange rates? 

Accessing Central Bank Information 

Go to www.bis.org/cbanks.htm to access the Web site link for the central bank in your target country. Determine whether this central bank intervenes to control its currency in the foreign exchange market.

Assessing Spot and Forward Rates

1. Review the data on forward and spot rates of your main foreign currency to determine whether the foreign currency typically exhibits a discount or a premium. Then review data on interest rates to compare the foreign country of concern and the U.S. interest rates. Does it appear that the forward rate of the foreign currency exhibits a premium (discount) when its interest rate is lower (higher) than the U.S. interest rate, as suggested by interest rate parity? 

Determining Whether IFE Holds

1. Use an onlinedata source to record the interest rate differential between the interest rate of the foreign country in which you plan to do business and the U.S. interest rate over the last five or so quarters. Then, review the exchange rate percentage change in the foreign currency of concern over each of those corresponding quarters to determine whether the international Fisher effect (IFE) appears to hold over those quarters for that currency.