The current exchange rate for the Japanese yen is 0012 After supply and demand

The current exchange rate for the japanese yen is

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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 Page 4 of 7
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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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