Chapter 6 International Parity Relationships

26. A financial manager has detrermined that the appropriate rate discount for a foreign project is 17 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively.

11. Describe at least three exchange rate factors that are likely to attract foreign investors to a country 's currency. Explain why these factors are attractive for foreign investors. (3-6 sentences. 3.0 points)

b. Explain what impact the change in the value of the dollar between 2008 and 2009 will have on the United States current account.

2) Interest rate parity (how exchange rate is determined by the flows of capital) and

Whether the United Kingdom decides to join the European single currency and replace the pound with the euro will have profound economic as well as political effects on the country so is a very important decision and has considerable variations in attitudes towards the topic, although the British public opinion has consistently opposed joining the euro. The euro is currency shared by 18 of the European Union's Member States. The euro was introduced in 1999 and automatically became the new official currency of 11 States, followed by another 7 countries joining to date. However, the UK negotiated an opt-out to from the Treaty meaning they don’t have to adopt the common currency as they fit a certain criteria [1]. Joining the European single currency can have major advantages for the UK, such as diminished uncertainty of exchange rate for businesses and the decreased need to pay transaction costs of changing currencies when abroad. It can also have disadvantages such as loss of domestic monetary policy and variable rate debt in the UK.

i) Given that Dozier industries does nothing to hedge this risk, assuming that spot exchange rate remains the same as on Jan 14,1986 levels,

The next video will introduce you to a system to evaluate (back test) a currency trading system. You will need to pull one day's worth of minute by minute data for three currency pairs from http://www.forexrate.co.uk/. We will use the closing price for each minute and we will need both the bid and the ask prices. You can find this video here:  "Triangular arbitrage part II."  This clip runs about 5 minutes.

Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR), stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with hedging was also introduced in the analysis. The three main policies are of not hedging, 100% hedging with forward contracts and 100% hedging with options.

Back to the case, the coupon rate of Swiss Franc is much lower than other currencies. But it is not the standard of evaluating which currency should be borrowed. We will use forward rates computed from the parity to evaluate the borrowing cost of each currency and the currency has the lowest cost should be chosen. The basic known information is listed as following:

1) What are Aspen Technology’s main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need?

Practicing CIA (Covered Interest Arbitrage) by borrowing CAD 96 Million to buy USD on April 1, 2002, and invest the USD for six months. At CAD interest rates of 2.70% for borrowing and 2.55% for depositing, and USD interest rates of 1.85% for borrowing and 1.65% for depositing.

b) & c) With a same $18,000 investment, in order to earn $35,000 after 6 years, how the nominal interest rates of the First National Bank differ if coumpounded annually, semiannually, quarterly and daily?

International Financial Management Trial Exam Closed Book Examination INCLUDEPICTURE uvafileserverjligter1DataOnderwijsInternational Financeif2008sbriederLocal SettingsTempRarDI04.890ABS-logo.gif MERGEFORMAT Closed Book Examination Answer as brief and concise as possible redundant or superfluous remarks may lead to a lower score. The maximum score per problem is given between parentheses. The maximum score of the whole exam is 100 points. QUESTION 1 - 20 points SHAPE MERGEFORMAT This graph depicts the REAL value of the broad index which is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. a) Consider the following table of price levels,

The value of the bond will decrease if the dollar drops. The depreciation in the currency that the bond will pay the principal in makes the bond less valuable to investors.

Because the interest rates are expected to decline, I would assume the capital flows will decrease to the UK. Since the US interest rates are expected to rise, capital flows to the US will increase. However, the inflation rates implies that the US purchase more British goods and will sells less goods to the UK due to the changes in prices in the two countries. Since Mesa believes that capital flows are more important, they believe the pound will depreciate in the future.