# Problem 21 7 hedging exchange rate risk lo21 3 you

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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