W09 Forex Practice Problem Solutions

# W09 Forex Practice Problem Solutions - SpotRates...

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MGMT 370 Fall 2008/Winter 2009 Answers to Foreign Exchange Problems Spot Rates 1. C\$1000 x /.7857 \$ / C\$ = \$785.70 To make the two fares equal, requires a rate of 1.020\$ / C\$ (C\$1000 x ?? \$/C\$ = \$1020) on October 24 th . The two tickets are quite different in price, with Canadian ticket \$235 cheaper. The value of the Canadian dollar has gone down a lot, and perhaps the airlines haven’t adjusted yet. The forward rate gave an expected rate on October 24 th of much closer to the rate that would make the two tickets of equal price. C\$1000 x .9650 \$/C\$ = \$965.00. 2. ¥26,000 x .01059 \$ / ¥ = \$275.34 (October 24 th ) Paying in Yen is more expensive, since in dollars the cost is \$260. Note that if you use the September rates, the solution is reversed. Note: Always remember to put the units of the transaction in to make sure you have not taken the reciprocal of the required rate. (¥ x \$ /¥ = \$) Show units on any exam question or you will lose points. Forward Rates To see if the value of the foreign currency increased, always use ‘US \$ Equivalent’ or ‘in US \$’ rates. That rate measures how much the foreign currency is worth. If the number is higher on the later date, then the value of the foreign currency has gone up. British Pound (1.8454 –1.8469) / 1.8469 = -.000812 or - .08% for the expected change as measured by the forward rate. There was an expectation of a small depreciation of the British Pound. Actual Change was (1.5904 –1.8469) / 1.8469 = -.1389 or – 13.89% The forward rate did correctly predict the direction of the change, but was off a lot on the amount . Japanese Yen

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W09 Forex Practice Problem Solutions - SpotRates...

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