finance assignment

Sheet1

month	stock return	exchange rate (USD is base currency)
1	0.48%	57.097
2	0.94%	56.456
3	0.27%	57.436
4	2.75%	57.999
5	-4.03%	54.222
6	0.19%	51.954
7	-1.76%	50.892
8	-0.46%	50.619
9	-3.75%	52.096
10	2.42%	52.675
11	-0.45%	54.424
12	-3.43%	54.776
13	8.40%	56.466
14	0.49%	57.308
15	-0.09%	59.113
16	0.80%	60.818
17	1.41%	61.322
18	5.56%	60.024
19	2.92%	60.074
20	-4.28%	61.502
21	4.72%	61.655
22	-3.43%	61.859
23	0.99%	60.399
24	0.02%	59.755
25	-5.57%	60.197
26	5.17%	59.380
27	-2.49%	59.125
28	-5.82%	59.662
29	7.78%	58.150
30	-1.83%	54.013
31	3.00%	53.713
32	6.18%	51.472
33	-7.25%	50.870
34	4.32%	51.031
35	0.29%	50.887
36	5.51%	51.229
37	2.01%	51.170
38	1.00%	51.063
39	-8.45%	51.881
40	2.79%	51.730
41	2.28%	50.037
42	4.46%	48.885
43	-0.06%	49.605
44	-4.74%	48.906
45	-0.07%	49.836
46	0.99%	48.618
47	-5.53%	50.459
48	4.67%	48.879
49	5.20%	47.385
50	3.97%	46.501
51	2.73%	44.529
52	-4.40%	41.895
53	2.69%	40.515
54	-1.98%	39.507
55	2.11%	39.068
56	-7.43%	39.345
57	3.34%	39.467
58	5.34%	39.658
59	-2.08%	39.833
60	3.12%	40.626
61	6.72%	41.233
62	3.45%	39.235
63	-3.49%	38.482
64	4.08%	38.898
65	-0.88%	38.780
66	1.12%	38.322
67	-3.45%	38.398
68	3.59%	38.483
69	1.07%	39.621
70	1.45%	40.213
71	-0.96%	40.563
72	1.69%	41.589
73	4.54%	40.824
74	1.70%	41.268
75	-4.44%	41.313
76	4.12%	41.669
77	3.73%	41.259
78	4.78%	40.864
79	5.52%	42.179
80	1.40%	42.686
81	9.96%	43.750
82	-1.67%	45.403
83	-3.84%	45.987
84	-2.82%	46.726
85	5.18%	45.358
86	-2.82%	45.070
87	-4.82%	45.551
88	-0.35%	44.975
89	8.06%	44.634
90	-0.73%	45.184
91	11.01%	45.637
92	-2.15%	47.449
93	3.85%	47.184
94	-1.55%	48.307
95	14.19%	48.322
96	-2.05%	49.460
97	8.73%	48.928
98	-4.38%	46.458
99	-5.63%	45.060
100	-3.41%	45.638
101	7.28%	48.483
102	-16.68%	49.983
103	2.28%	53.287
104	1.11%	54.681
105	-0.92%	53.426
106	-8.62%	53.458
107	-2.73%	52.180
108	-3.29%	51.339
109	4.79%	50.378
110	-0.92%	53.515
111	-3.86%	53.909
112	-1.18%	56.225
113	1.10%	55.536
114	7.46%	57.933
115	7.52%	57.522
116	3.20%	58.367
117	-0.38%	60.707
118	-0.62%	61.344
119	1.53%	60.387
120	8.73%	59.466
121	3.56%	58.630
		60.252

AZspring 2017 exam 2-3.docx

Important: For problems that require calculation, you must show all your work, including any equations and worksheet files you use to solve the problems. If you solve the problem using a calculator, provide a brief description of how you obtained the answer. Only partial credit will be given even for correct answers if you do not provide this backup information or explanation – even if the answer is correct.

On questions that require explanation, no additional credit is available for length of explanation. So answer as briefly as possible but do no omit information that is necessary to show that you understand.

Indicate specifically additional assumptions you make, if any.

1. For each of the following methods of forecasting foreign exchange, explain what data you would need and specify the formula you would use to calculate the future exchange rate for a foreign currency.

a. purchasing power parity

b. weighted average

c. autoregression

2. Which of the methods in the previous question would be the best method to use for a short-term (e.g., 1-day) forecast, and which would be best for a long-term (e.g., 3-year) forecast? Explain.

3a. Identify three ways an investor in the U.S. can include risks associated with foreign business operations in an investment portfolio without trading securities in a foreign securities markets.

b. Explain how including risks associated with foreign business operations will always affect the portfolio.

4. Name two ways a company could structure that portion of its business located in a foreign country to reduce the risk that future government decisions will adversely affect the success of that business.

5. A company has an asset denominated in Brazilian real. How will an increase in the value of that currency be reflected on its balance sheet?

6. A company expects to receive €5 million in 9 months. How can it hedge the risk associated with this payment using:

a. a money market hedge?

b. a forward contract?

c. a foreign currency option?

(For each of the above, be as specific as possible regarding amounts, and type and characteristics of contracts.)

7. Using the data in the attached spreadsheet, determine the economic risk of the company to the currency for which exchange rates are provided (the dollar is the base currency in the quote), including:

a. the magnitude of the risk (how much the stock price changes on average with a change in the value of the currency;

b. whether an increase in the value of the currency causes the stock price to increase or decrease;

c. whether the relationship between the stock price and the currency is statistically significant; and

d. how fully hedging the risk associated with the currency is expected to affect the risk of the stock.