INTERNATIONAL FINANCE

· Chapter 7: Questions 7, 13, and 27

· Chapter 8: Questions 11 and 18

· Chapter 9: Questions 10 and 15

 

QUESTION 7 CHAP 7

Covered Interest Arbitrage Assume the following information:

Spot rate of Mexican peso	$.100
180-day forward rate of Mexican peso	$.098
180-day Mexican interest rate	6%
180-day U.S. interest rate	5%

Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer.

QUESTION 13 CHAP 7

Interest Rate Parity Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes.

a. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false? If false, correct the statement.

b. If interest rate parity exists, then the return for British investors who use covered interest arbitrage will be the same as the return for British investors who invest in British Treasury bills. Is this statement true or false? If false, correct the statement.

QUESTION 27 CHAP 7

Interpreting Changes in the Forward Premium Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $.70, while the one-year forward rate is $.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, the one-year forward rate is higher than it was at the beginning of the month. Yet the one-year forward discount is larger (the one-year premium is more negative) at the end of the month than it was at the beginning of the month. Explain how the relationship between the U.S. interest rate and the Canadian interest rate changed from the beginning of the month until the end of the month.

CHAPTER8 QUESTION 11

PPP Applied to the Euro Assume that several European countries that use the euro as their currency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States. According to PPP, how will the euro’s value against the dollar be affected?

CHAPTER 8 QUESTION 18

Estimating Depreciation Due to PPP Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?

· Chapter 9: Questions 10 and 15

QUESTION 10 CHAPTER 9

1. Forecasting with a Forward Rate Assume that the four-year annualized interest rate in the United States is 9 percent and the four-year annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate of the Singapore dollar is $.60. If the forward rate is used to forecast exchange rates, what will be the forecast for the Singapore dollar’s spot rate in four years? What percentage appreciation or depreciation does this forecast imply over the four-year period?

CHAPTER 9 QUESTION 15

Forecasting the Euro Cooper, Inc., a U.S.-based MNC, periodically obtains euros to purchase German products. It assesses U.S. and German trade patterns and inflation rates to develop a fundamental forecast for the euro. How could Cooper possibly improve its method of fundamental forecasting as applied to the euro?

CASE STUDY TREATED SEPARATELY AT LEAST 1 FULL PAGE WITHOUT THE COVER

Small Business Dilemma, page 255, text

Read the case and write an executive summary on the case, including answers to the following two questions.

Assessment of Prevailing Spot and Forward Rates by the Sports Exports Company

As the Sports Exports Company exports footballs to the United Kingdom, it receives British pounds.  The check (denominated in pounds) for last month's exports just arrived.  Jim Logan (owner of the Sports Exports Company) normally deposits the check with his local bank and requests that the bank convert the check to dollars at the prevailing spot rate (assuming that he did not use a forward contract to hedge this payment).  Logan's local bank provides foreign exchange services for many of its business customers who need to buy or sell widely traded currencies.  Today, however, Logan decided to check the quotations of the spot rate at other banks before converting the payment into dollars.

1.  Do you think Logan will be able to find a bank that provides him with a more favorable sport rate than his local bank?  Explain.

2.  Do you think that Logan's bank is likely to provide more reasonable quotations for the spot rate of the British pound if it is the only bank in town that provides foreign exchange services?  Explain.