Forex_Worksheet_II_Answerkey

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Unformatted text preview: INTERNATIONALBUSINESS200 Name:       DiscussionSectionNumber:    Fall2011   ForeignExchangeWorksheet ­PartII    Aswediscussedinclass,thebiggestmarketintheworldisinforeignexchange.Althoughcurrenciesareexchangedforglobal trade,tourism,andinvestments,muchofdailyforeignexchangeisconductedforspeculativepurposes .Governmentsalso playabigroleintheforexmarket.Thus,understandingtheglobalmonetarysystemandcurrencyexchangeisanimportant aspectofinternationalbusiness.  1. Drawachartovertimeforoneofthefollowingexchangerateregimes,andthenanswerthequestionsbelow.   ­fixed/peggedexchangerate  ­crawlingpeg  ­managed/dirtyfloat  ­floating  a. Drawhere:  Free Floating or Floating Exchange Rate Fixed/Pegged Exchange Rate     Value               Value               Time  Value    Managed Float/Dirty Exchange Rate Crawling Peg Exchange Rate    Time Value            Time   Foryourchosenregime:   b. Whoorwhatdeterminestheexchangerate?      Time    Fixed/PeggedExchangeRates:Thegovernmentdeterminestheexchangerate.  CrawlingPeggedExchangeRates:Thegovernmentdeterminestheexchangerate.    FreeFloating/FloatingExchangeRates:Governmentsfocusmoreoninterestratesandfiscalpolicyrather thandirectlyinterveninginthemarketorsettingexchangerates.       INTERNATIONALBUSINESS200 Name:       DiscussionSectionNumber:         c.    Fall2011   ForeignExchangeWorksheet ­PartII   Managed/DirtyFloatExchangeRates:Themarket,viasupplyanddemandmechanisms.However,the  governmentintervenes(buy&sells)inthecurrencymarketstoprotectitsnationalinterests.    Whatroledoesthegovernmentplayinthisexchangerateregime?(Youmayneedtoconsidertheroleofthe governmentinabroadercontext.)   Fixed/PeggedExchangeRates:Thegovernmentplaystheprimaryrole.Itsetsexchangerate,andmanages theeconomyaccordingly.   CrawlingPeggedExchangeRates:Thegovernmentplaystheprimaryrole.Itsetstheexchangerate,and  makesgradualadjustmentstoit.   FreeFloating/FloatingExchangeRates:Governmentsfocusmoreoninterestratesandfiscalpolicyrather thandirectlyinterveninginthemarketorsettingexchangerates.     Managed/DirtyFloatExchangeRates:Thegovernmentintervenes(buy&sells)inthecurrencymarkets.             d.    When(orhowoften)istheraterevised?  Fixed/PeggedExchangeRates:Therateisnotrevisedveryoften.    CrawlingPeggedExchangeRates:Therateisrevisedatpredeterminedtimeintervals.    FreeFloating/FloatingExchangeRates:Noonerevisestherates,buttheychangeeachtimethereisa  transaction,respondingtodemand&supply.   Managed/DirtyFloatExchangeRates:Noonerevisestherates,buttheychangeeachtimethereisa  transaction,respondingtodemand&supply.        2.  AssumeaUSBdrivecosts3.00USDinNewYorkandcosts65,000.00VNDinHanoi. a. UsetheLawofOnePricetofindtheunderlyingexchangerate.  3USD=65,000VND  1VND=3/65000=0.00004615USDor1USD=65000/3=21666.67VND  b. Iftheactualexchangerateis1USD=20,500.00VND,whereistheflashdriveunderpriced?    Iftheactualexchangerateis1USD=20,500.00VND,costofflashdriveinHanoiis3.17USD  CostofUSBDriveinHanoiconvertedthroughtheactualexchangerate:  65000VND=65000/20500USD=3.17USD  Therefore,theflashdriveisunderpricedinNewYork(3.00USD)andoverpricedinHanoi(3.17USD).  3. WritetheFisherEffectequationandlabeleachcomponent:   NominalInterestRate(i)=RequiredRealRateofInterest(r)+ExpectedInflationRate(I)    Equivalently,i=r+I   INTERNATIONALBUSINESS200 Name:       DiscussionSectionNumber:    4.  5. Fall2011   ForeignExchangeWorksheet ­PartII      WhatdoestheFisherEffecttheorizeabouttheimpactofinflationonfuturecurrencyvalue?  TheinternationalFishereffectstatesthatforanytwocountries,thespotexchangerate sshouldchangeinanequal amountbutintheoppositedirectiontothedifferencein theirnominalinterestrates.  ForEx.:IftheUSnominali dollaragainsttheyenshouldfallbythatinterestratedifferentialinthefuture.SoiftheinterestrateinUSis10%and in Japanis6%,wewouldexpectthevalueofthedollartodepreciateby4%againsttheJapaneseyen.  Usingthegivenspotrateandinterestratesbelow,andtheInternationalFisher Effect,calculatethe3monthand6 monthforwardratebetweenUSdollar(USD)andIndonesianRupiah(ID R).  InterestRate(Annual) USD 2.00% IDR 10.00%        ExchangeRates 3months 6months ForwardRate ForwardRate 1USD=9038.86IDR 1USD=9213.5IDR SpotRate (IDRperUSD)     1USD=8,862.5IDR   Solvingfor3 ­MonthForwardRate   Spotrate8,862.5INDR=1USD, AssumingInternationalFisherEffect,eachcurrencyisaffectedbythecurrentinterestrateforthe3months  8,862.5*(1+(10%/4))=1USD*(1+(2%/4)) 8,862.5*(1+(0.10/4))=1USD*(1+(0.02/4)) 9038.86IDR=1USDor1USD=9038.86IDR   Solvingfor6 ­MonthForwardRate  8,862.5*(1+(10%/2))=1USD*(1+(2%/2)) 8862.5*(1+(0.1/2))=1USD*(1+(0.02/2)) 9213.5IDR=1USDor 1USD=9213.5IDR  6.     What,ifanything,guarantiesthecurrencypairwillactuallybetradingatthespotmarketin samevalueascalculatedfortheforwardrateinquestion5above?  Aswehavereiterated,itishardtopredictwithcertaintythespotrateforanycurrencyatatimeinthefuture.  However,therearesomeindicatorsyoucoulduse: Theinflation&interestrates  Unit,etc. INTERNATIONALBUSINESS200 Name:       DiscussionSectionNumber:    7. Fall2011   ForeignExchangeWorksheet ­PartII    Inthefollowingscenariosidentifywhichstrategy leadorlag wouldbemoreadvantageousintermsofforex transactions?(Remember:Youarelookingoutforyourowninterestsineachscenario.)   a. YouareaU.S.companythatisexpectingareceivableinIndianrupeesandyouexpecttherupeetodepreciate betweennowandwhenthepaymentwillbepaidtoyou . Thatis,ittakesmoreIndianRupeestobuyaUSDinthefuturewhenyoureceivethepayment therefore, LeadStrategyi.e.collectpaymentsasearlyaspossibletotransferittoasmanydollarsaspossible  b. YouareaU.S.companythatowesapaymentinGBPandyouexpectthe GBPtodepreciatebetweennowand whenthepaymentisdue. Thatis,yougetmoreGBPforaUSDinthefuturewhenthepaymentisdueor therefore,LagStrategyi.e. delaypaymentssoyoucanspendlessUSDtotransferintotheGBPyouowe.  c. YouareaU.S.companythatisexpectingareceivableinEurosandyouexpecttheEurotoappreciatebetween nowandwhenthepaymentwillbepaidtoyou. Thatis,yougetmoreUSDforaEurointhefuturewhenthereceiptofmoneyisdue therefore,LagStrategy i.e.delayreceivablessothatyoucantransfertheEurosintomoreUSD  d. YouareaU.S.companythatowesapaymentinPesosandyouexpectthePesotoappreciatebetweennowa nd whenthepaymentisdue. Thatis,yougetlessPesosforaUSDinthefuturewhenthepaymentisdue therefore,LeadStrategyi.e. fasterpaymentofpayablessothatyoucantransferlessUSDintothePesosyouowe.  8.  Definethefollowingforeignexchangeriskterms: TranslationRisk:Translationexposureistheimpactofcurrencyexchangeratechangesonthereportedfinancial statementsofacompany.Translationexposureisconcernedwiththepresentmeasurementofpastevents.Theresulting accountinggainsorlossesaresaidtobeunrealized      TransactionRisk:Transactionexposureistheextenttowhichtheincomefromindividualtransactionsisaffectedby fluctuationsinforeignexchangevalues.Suchexposuresincludeobligationsforpurchaseorsaleofgoodsandservicesat previouslyagreedpricesandtheborrowingorlendingoffundsinforeigncurrencies.    EconomicRisk: isaffectedby changesinexchangerates.Economicexposureisconcernedwiththelong  ­runeffectofchangesinexchangerateson futureprices,salesandcosts.  Thisisdistinctfromtransactionexposure,whichisconcernedwiththeeffectofexchangera techangesonindividual transactions,mostofwhichareshort ­termaffairsthatwillbeexecutedwithinafewweeksormonths.       ...
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