The current exchange rate for the Japanese yen (¥) is $0.012. After supply and demand
for the Japanese yen has adjusted in the manner suggested by purchasing power parity
theory,
what will be
the new exchange rate for the yen? (Assume US is home). Use the formal
PPP formula. 4 Marks
EF = (1+0.02) / (1+0.013) – 1 = 0.69%
¥ 1 = $0.012
EF = 0.012 / (1+0.0069) = 0.0119 USD
¥ 1 = $0.0119
6.
Exposure of a Portfolio of Currencies. Volusia, Inc. is a U.S
.-based exporting
firm that expects to receive payments from sales denominated in both euros and
Canadian dollars in one month. Based on today’s spot rates, the dollar value of
the funds to be received is estimated at $200,000 U.S. for the euros and $800,000
U.S. for the Canadian dollars. Based on data for the last fifty months, Volusia
estimates the standard deviation of monthly percentage changes to be 10 percent
for the euro and 5 percent for the Canadian dollar. The correlation coefficient
between the euro and the Canadian dollar is 0.48. Assuming that on average, the
currencies appreciate each month; 0.12 % percent per month for the euro and
0.15% per month for the Canadian dollar. This means average return due to
currency fluctuations is 0.12% for euro, and 0.15% for Canadian dollar.
a)
Describe why holding a portfolio of two foreign currencies with a correlation
coefficient of 0.95 could be considered high risk
.
2 Marks
Seeing as how correlation coefficient is defined as the degree to which two currencies
move in relation to each other, a portfolio of two foreign currencies which have a 95%
correlation rate would be very high risk. This means that the two currencies are highly
interdependent on the fluctuation of one another.
b)
What is the expected % rate of return on the euro for the next month? How
much is that in US dollars? 1 Mark
$0.0012*$200,000= $240
c)
What is the expected % rate of return on the Canadian dollar for the next
month? How much is that in US dollars. 1 Mark
$0.0015*$800,000= $1,200
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d)
What is the expected % rate of return on the portfolio in the next month?
2Marks
E(et) = (0.20 x 0.12%) + (0.80 x 0.15%)
E(et) = 0.00024 + 0.0012
E(et) = 0.00144 which is the same as 0.144%
e)
What is the portfolio’s standard deviation?6 Marks
y
and
x
currencies
in
changes
percentage
of
t
coefficien
n
correlatio
y
or
currency x
in
changes
percentage
of
deviation
standard
y
or
currency x

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- Summer '19
- Foreign exchange market, United States dollar, dollar, ISO 4217, cent, dollars