Managerial Finance

" ^ ^ ^,l,qf a ra,r *r[^M.* *.fu ^-, c a cQchapter t, -' --' uurtir=atioriai Financial Managemenr

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w'?, Interest Rate Parity

{lrut Purchasing Power

ParitY

fierQ Exchange Rate

intermediate Froblerns 5-$

(17-s)

Currency Appreciation

117-6t Cross Rates

(77-4 Interest Rate ParitY

lL7-81 Purchasing Power

Parity

Challenging Probiems 9-1,*

(17-e)

Exchange Gains and Losses

(17-10)

Results of Exchange Rate Changes

(17-11.)

Spot and Forward Rates

The nominal yield on 6-month T-bilts is 7%, while default-free |apanese bonds that

mature in 6 months have a nominal rate of 5.57o, In the spot exchange market, 1 yen equals $0.009. If interest rate parity holds, what is the 6-month forward exchange rate?

A computer costs $500 in the United States. The same model costs 550 euros in France.

If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

If euros sell for $1.50 (U.S.) per euro, what should dollars sell for in euros per dollar?

Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the fianc appreciates l0%

against the dollar, how many francs would a dollar buy tomorrow?

Suppose the exchange rate between U.S. dollars and the Swiss franc is SFrl.6 = $1 and tlre

exchange rate between the dollar and the British pound is f,1 = ii1.50. What then is the

cross rate between francs and pounds?

Assume that interest rate parity holds. in both the spot market and the 90-day forward market, I |apanese yen equals 0.0086 dollar. In iapan, 90-day risk-free securities yield 4.6%. What is the yield on 90-day risk-free securities in the united States?

in the spot market, 7.8 pesos can be exchanged for I u.S. dollar. A pair of headphones costs $15 in the Linited States. If purchasing power parity holds, what should be the price

of the same headphones in Mexico?

Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a

50 million-peso loan from a Mexico City bank iast month to fund the expansion of

your Monterrey, Mexico plant. When you took out the loan the exchange rate was

10 U.S. cents per peso, but since then, the exchange rate has dropped to 9 U.S. cents Per peso. Has Wruck Enterprises made a gain or a loss due to the exchange rate change, and how much? Note that your shareholders live in the United States.

In 1983 the |apanese yen-U.S. dollar exchange rate was 245 yen per dollar, and the dollar cost ofa compact |apanese-manufactured car rvas $8,000. Suppose that now the exchange rate is 80 yen per <iollar. Assume there has been no inflation in the yen cost of an

automobile so that all price changes are due to exchange rate changes. What would the

dollar price of the car be now, assuming the car's price changes oniy with exchange rates?

Boisjoly Watch Lnports has agreed to purchase I5,000 Swiss watches for I million francs at today's spot rate. The firm's financial manager, fames Desreumaux, has noted

the following current spot and forward rates:

U.S. Dollar/Swiss Franc Swiss Franc/U'S' Dollar

721

Spot

30-day forward

90-day forward

i80-day forward

1.6590

r.6540

t.6460

1.6400

0.6028

0.6046

0.6075

0.6098