Global Finance Assignments 4-6

Q1: You are hired as a consultant to assess a firm’s ability to forecast.  The firm has developed a point forecast for two different currencies presented in the following table.  The firm asks you to determine which currency was forecasted with greater accuracy.  (Use absolute forecast error as a percentage of the realized value)

Yen Actual Pound Actual

Period Forecast Yen Value Forecast Pound Value

1 $.0050 $.0051 $1.50 $1.51

2 .0048 .0052 1.53 1.50

3 .0053 .0052 1.55 1.58

4 .0055 .0056 1.49 1.52

Q2: Assume that the fouryear annualized interest rate in the United States is 9 percent and the fouryear annualized interest rate in Singapore is 6 percent.  Assume interest rate parity holds for a fouryear 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 fouryear period?

Q3: Your employer, a large MNC, has asked you to assess its transaction exposure.  Its projected cash flows are as follows for the next year:

Assume that the movements in the Danish krone and the pound are highly correlated. Provide your assessment as to your firm’s degree of transaction exposure (as to whether the exposure is high or low).  Substantiate your answer.