Week 3 Sol

# Week 3 Sol - 17-1 \$1 = 9 Mexican pesos \$1 = 111.23 Japanese...

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17-1 \$1 = 9 Mexican pesos; \$1 = 111.23 Japanese yen; Cross exchange rate, yen/peso = ? Cross Rate: = . Note that an indirect quotation is given for Mexican; however, the cross rate formula requires a direct quotation. The indirect quotation is the reciprocal of the direct quotation. Since \$1 = 9 pesos, then 1 peso = \$0.1111. Yen/Peso = 0.1111 dollars per peso × 111.23 yen per dollar = 12.358 yen per peso. 17-2 r Nom , 6-month T-bills = 7%; r Nom of similar default-free 6-month Japanese bonds = 5.5%; Spot exchange rate, e 0 : 1 Yen = \$0.009; 6-month forward exchange rate = f t = ? . r f = 5.5%/2 = 2.75%. r h = 7%/2 = 3.5%. e 0 = \$0.009. = 1.0275 f t = \$0.00932 f t = \$0.00907. The 6-month forward exchange rate is 1 yen = \$0.00907. 17-3 U. S. T.V. = \$500; French T.V. = 550 euros; Spot rate between euro and dollar = ? P h = P f (e 0 ) \$500 = 550 euros(e 0 ) 500/550 = e 0 \$0.9091 = e 0 . 1 euro = \$0.9091 or \$1 = 1 / 0.9091 = 1.1000 euros.

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17-9 The U. S. dollar liability of the corporation falls from \$0.75(5,000,000) = \$3,750,000 to \$0.70(5,000,000) = \$3,500,000, corresponding to a gain of 250,000 U. S. dollars for the corporation. However, the real economic situation might be somewhat different. For example, the loan is presumably a long-term loan. The exchange rate will surely change again before the loan is paid.
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