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# Ch22_5th - Solutions to Chapter 22 International Financial...

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Solutions to Chapter 22 International Financial Management 1. a.You can buy: 100/1.2952 = 77.21 euros for \$100 You can buy: 100 × 1.2952= 129.52 dollars for 100 euros b. You can buy: 100 × 1.1919 = 119.19 Swiss francs for \$100 You can buy: 100/1.1919 = 83.90 dollars for 100 Swiss francs c.If the British pound depreciates, then \$1 will buy more British pounds, so the direct exchange rate (\$/£) will decrease and the indirect exchange rate (£/\$) will increase. d. One U.S. dollar can buy 1.2333 Canadian dollars. Therefore, one U.S. dollar is worth more than one Canadian dollar. 2. a.103.155 ¥ /\$ b. 99.930 yen = 1 dollar c.The yen is selling at a forward premium on the dollar. You get fewer yen for each dollar in the forward market. d. % 23 . 3 0323 . 0 930 . 99 930 . 99 155 . 103 = = - e. \$ / ¥ \$ / ¥ \$ ¥ s f r 1 r 1 = + + 155 . 103 930 . 99 034 . 1 1 ¥ = + r r ¥ = 0.00167 = 0.167% f. 99.930 yen = 1 dollar g. 9687 . 0 155 . 103 930 . 99 1 1 \$ / ¥ \$ / ¥ \$ ¥ = = = + + s f i i 22-1

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3. a.The interest rate differential equals the forward premium or discount, i.e., for currency x: \$ / x \$ / x \$ x s f r 1 r 1 = + + b. The expectations theory of forward rates, or the expectations theory of exchange rates, predicts that the forward rate equals the expected future spot exchange rate. Equivalently, the percentage difference between the forward rate and today’s spot rate is equal to the expected percentage change in the spot rate: \$ / x \$ / x \$ / x \$ / x s ) s ( E s f = c.Prices of goods in different countries are equal when translated to a common currency. It follows that the expected inflation differential equals the expected percentage change in the spot rate: \$ / x \$ / x \$ x s ) s ( E i 1 i 1 = + + d. Expected real interest rates in different countries are equal: ) i E(1 r 1 ) i E(1 r 1 \$ \$ x x + + = + + 4. If international capital markets are competitive, the real cost of funds in Japan must be the same as the real cost of funds elsewhere. That is, the low Japanese yen interest rate is likely to reflect the relatively low expected rate of inflation in Japan and the expected appreciation of the Japanese yen. Note that the parity relationships imply that the difference in interest rates is equal to the expected change in the spot exchange rate and also equal to the expected difference in inflation rates. If the funds are to be used outside Japan, Ms. Stone should consider whether to hedge against changes in the exchange rate, and how much this hedging will cost. 5. The following items are needed to do capital budgeting calculations in your own currency: Forecasts of the foreign inflation rate to produce cash-flow forecasts Forecasts of future exchange rates to convert cash flows into domestic currency Domestic interest rates to discount domestic currency cash flows 22-2
6. a.Buy euros forward. This locks in the dollar value of the euros that the importer will pay in six months. 7. If the dollar depreciates, then, in order to maintain a fixed yen price, Sanyo will need to raise the dollar price. This action can cause Sanyo to lose business in the U.S. It can hedge this exchange rate risk by selling dollars forward, so that any loss in U.S. profits due to dollar depreciation will be offset by gains on the forward sale of the dollar.

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