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ch12 sol - CHAPTER 12 INTERNATIONAL MARKETS ANSWERS TO...

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1 CHAPTER 12 INTERNATIONAL MARKETS ANSWERS TO END-OF-CHAPTER QUESTIONS 1. If a bushel of corn costs 3.00, and a British pound is worth $1.50, how many dollars would a person receive for 100,000 bushels of corn sold in Britain in the spot market? If the delivery were to occur in three months and the U.S. interest rate exceeded the British rate by 2 percent per year, what would likely be received in the forward exchange market for a conversion arranged now if the current spot rate is $1.50 per British pound? Explain. If a U.S. dollar cost of a British pound is $1.50 and corn is selling for $3.00 in the U.S., the pound cost of 100,000 bushels of corn in Britain's spot market is: d $1.50/poun $3.00 corn of Cost £2.00 The price of 100,000 bushels = £2 x 100,000 = £ 200,000 Assuming the forward/spot differential is reflected by interest rate differentials, if U.S. interest rates exceed British rates by 2 percent per year, we can assume that the U.S. inflation rate exceeds the British inflation rate by 2 percent per year and that the U.S. dollar is expected to depreciate by 2 percent per year, or (1.02) .25 or 1.00496 per quarter. The 90 day forward rate should be $1.50(1.00496) = $1.5074/ £ . 2. If a dollar can buy 98 Japanese yen and a British pound costs $1.50, how many yen would it take to buy £1 ? If a pound of copper costs £ 1 in Britain, ¥1,60 in Tokyo, and $1.45 in the United States, where is a pound of copper most expensive and where is it least expensive?
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