Problem 21-7 Hedging exchange rate risk [LO21-3]
You are the President of Finance for Exploratory Resources, headquartered in
Houston, Texas. In January 2010, your firm's Canadian subsidiary obtained a six-
month loan of 120,000 Canadian dollars. At the time of the loan, the spot
exchange rate was U.S. $0.8992/Canadian dollar and the Canadian currency was
selling at a discount in the forward market. The June 2010 contract (face value=
C$120,000 per contract) was quoted at U.S. $0.8924/Canadian dollar.
If the bank does hedge with the forward contract, what is the maximum amount it

Problem 31-1 Using Exchange Rates
Use the information in the table below to answer the following questions:
U.S. $
Equivalen
t
Currenc
y per
U.S.$
Polish Zloty
0.2987 3.3476
Euro
1.2349 0.8098
Mexican Peso
0.0752 13.2991
Swiss Franc
1.0277 0.9730
Chilean Peso
0.002071
482.80
New Zealand Dollar
0.8085
1.2369
Singapore Dollar
0.8008
1.2487
a.
If you have $240. How many polish

b.
How much is one-euro worth in U.S.

c.
If you have 4.80 million euro. How
many dollars do you have?

d.
Which is worth more, a New Zealand

e.
Which is worth more, a Mexican peso

f.
How many Swiss francs can you get
for a euro? What do you call this rate?

Problem 31-3 Forward Exchange Rates
Use the information in the table below to answer the following questions:
in U.S. $
per U.S.
$
Japanese yen
.009209 108.59
6-mos forward
.009302 107.50
British pound
1.5818
.6322
3-mos forward
1.5788
.6334
Problem 31-4 Using Spot and Forward Exchange Rates
Suppose the spot rate exchange rate for the Canadian dollar is Can$1.06 and the
six-month forward rate is Can$1.03.
a.

b.
Assuming absolute PPP holds, what is the cost in the U.S of an Elkhead
beer if the price in Canada is Can$2.74? the cost in U.S. dollar is:

c.
Is the U.S. dollar selling at premium or a discount relative to the Canadian

d.

Problem 31-6 Interest Rate Parity
Use the information below to answer the following questions.

Currency per U.S. $
Australia dollar
1.2389
6-months
forward
1.2344
Japan Yen
100.4500
6-months
forward
99.9300
U.K. Pound
.6797
6-months
forward
.6776
Suppose interest rate parity holds, and the current six-month risk-free rate in the United
States is 3 percent. Use the approximate interest rate parity equation to answer the
following questions.
a.
What must the six-month risk-free rate be in Australia?
(Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b.
What must the six-month risk-free rate be in Japan?
(Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
c.
What must the six-month risk-free rate be in Great Britain?
(Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
Problem 31-7 Interest Rates and Arbitrage
The treasure of major U.S. firms has $33 million to invest for Three months. The
annual interest rate in the U.S. is 0.21 percent per month. The interest rate in
Great Britain is 0.27 percent per month. The spot exchange rate is 0.632 British
pound. And the three-month forward rate is 0.634 British pound.
What would be the value of the investment if the money is invested in the U.S.
and if It is invested in Great Britain?

Problem 31-8 Inflation and Exchange rate