1) Assume the following exchange rates are indirect quotes, what are the equivalent direct quotes INDIRECT QUOTE DIRECT QUOTE $1=7.15 MXN (spot) ______________ $1=10.12 MXN (forward -30 day) ______________ $1=1.21 EUR _________.83_____ $1=120 JPY _________.0083_____ $1=1.7 CHF ___________.58___ 2) If you were comparing the price of hotel rooms in the above countries, the following would be the price in US dollars: 750 MXN (Spot) = _____________ 325 CHF = ________552.5_____ 650 EUR = _________786.5____ 40,000 JPY = ________4,800,000_____ 3) Suppose the Peso devalued by 15%, the hotel room in Mexico would now sell for __________Mexican Pesos which would equal ___________US dollars. 4) Suppose you exported something from Mexico to the US and were quoted a price (payable immediately) of 20,000 Pesos. What would your receipt in US dollars be? _____________. 5) Suppose you exported something from Mexico to the US and the payment of 20, 000 Pesos did not have to be received until 30 days from now. Your receipt in US dollars would then be? ________________. 6) Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calcualtions 1 British pound (spot) $1.7748 British pound (30-day futures) $1.7776 7) Assume that the British pound is selling in the United States at $1.5985 spot and $1.5939 in the 180-day forward market, and that the Canadian dollar is selling in the United States at $.7336 spot and $.7422 in the 180-day forward market. Both quotes are direct. Which of the following is correct? the Canadian dollar is selling at 2.3 percent premium in the forward market the Canadian dollar is selling at 1.17 percent premium in the forward market the Canadian dollar is selling at 1.17 percent discount in the forward market the British pound is selling at .57 percent premium in the forward market Assume you have $200 for an arbitrage transaction, what is your best course of action based on the following exchange rates? $1 = 1.7 CHF $1 = 1.4 PLN $1 = 2.0 PLN Assume you have $1,000 to invest in a triangular arbitrage transaction, what is your best course of action based on the following exchange rates? $1 = 4.5 CHF 1 CHF = 3 DKK $1 = 30 DKK 10) Solve the following problem assuming the price of a Big Mac is $5.50. In Denmark, a Big Mac costs 18.10 DKK. The actual exchange rate is $1.00=5.55 DKK. According to Purchasing Power Parity, calculate What do we expect to pay? What is the price in dollars? What should the exchange be? (This is the IPPP) What percentage is the DKK under or overvalued against the dollar? What percentage is the dollar undervalued or overvalued in relation to the DKK? 11) Assume you can purchase A Big Mac in the US for $5.36 and a Big Mac in China for 9.90 Yuan and the actual exchange rate for the Chinese Yuan is 7.74 per US dollar. According to Purchasing Power Parity, calculate: What do we expect to pay? 9.90 yuan for the big mac What is the price in dollars? $1.28 What should the exchange be? (This is the IPPP) What percentage is the DKK under or overvalued against the dollar? What percentage is the dollar undervalued or overvalued in relation to the DKK? 12) If the spot rate is CHF 1.600=$1 USD, and the expected inflation rates for Switzerland and the United States are 3% and 5% respectively, the USD is expected to depreciate versus the CHF USD is expected to appreciate versus the CHF CHF is expected to depreciate versus the USD CHF is expected to remain the same versus the USD JPY would probably appreciate versus the USD and CHF 13) Drawing on the 3 U.S. methods of treatment of foreign corporate income tax, calculate the net income after tax: Income: $175 Foreign tax at 39% U.S. tax at 40% Credit Deduction Double Taxation Income earned by the foreign corporation Calculate net income after tax 14) Calculate the cumulative VAT on a leather jacket in Italy. Show the VAT generated at each stage of production. Stage of Production Selling Price Value Added at 10% Cumulative VAT RAW MATERIAL 50 EUR MANUFACTURING 200 EUR ASSEMBLY 400 EUR RETAILER 625 EUR 15) Calculate the cumulative VAT on a loaf of bread in Canada. Show the VAT generated at each stage of production. Stage of Production Selling Price Value Added at 15% Cumulative VAT FARMER $ .50 MILLER $2 .75 WHOLESALER $3.10 RETAILER $3.90 16) Define the 3 major ways to reduce foreign exchange risk including (1) Transaction, (2) Economic, and (3) Translation Exposure and provide examples of how a manager could reduce each type of risk.
1) Assume the following exchange rates are indirect quotes, what are the equivalent direct quotes
INDIRECT QUOTE DIRECT QUOTE
$1=7.15 MXN (spot) ______________
$1=10.12 MXN (forward -30 day) ______________
$1=1.21 EUR _________.83_____
$1=120 JPY _________.0083_____
$1=1.7 CHF ___________.58___
2) If you were comparing the price of hotel rooms in the above countries, the following would be the price in US dollars:
750 MXN (Spot) = _____________
325 CHF = ________552.5_____
650 EUR = _________786.5____
40,000 JPY = ________4,800,000_____
3) Suppose the Peso devalued by 15%, the hotel room in Mexico would now sell for __________Mexican Pesos which would equal ___________US dollars.
4) Suppose you exported something from Mexico to the US and were quoted a price (payable immediately) of 20,000 Pesos. What would your receipt in US dollars be? _____________.
5) Suppose you exported something from Mexico to the US and the payment of 20, 000 Pesos did not have to be received until 30 days from now. Your receipt in US dollars would then be? ________________.
6) Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calcualtions
1 British pound (spot) $1.7748
- British pound (30-day futures) $1.7776
7) Assume that the British pound is selling in the United States at $1.5985 spot and $1.5939 in the 180-day forward market, and that the Canadian dollar is selling in the United States at $.7336 spot and $.7422 in the 180-day forward market. Both quotes are direct. Which of the following is correct?
- the Canadian dollar is selling at 2.3 percent premium in the forward market
- the Canadian dollar is selling at 1.17 percent premium in the forward market
- the Canadian dollar is selling at 1.17 percent discount in the forward market
- the British pound is selling at .57 percent premium in the forward market
- Assume you have $200 for an arbitrage transaction, what is your best course of action based on the following exchange rates?
$1 = 1.7 CHF
$1 = 1.4 PLN
$1 = 2.0 PLN
- Assume you have $1,000 to invest in a triangular arbitrage transaction, what is your best course of action based on the following exchange rates?
$1 = 4.5 CHF
1 CHF = 3 DKK
$1 = 30 DKK
10) Solve the following problem assuming the price of a Big Mac is $5.50. In Denmark, a Big Mac
costs 18.10 DKK. The actual exchange rate is $1.00=5.55 DKK. According to
- What do we expect to pay?
- What is the price in dollars?
- What should the exchange be? (This is the IPPP)
- What percentage is the DKK under or overvalued against the dollar?
- What percentage is the dollar undervalued or overvalued in relation to the DKK?
11) Assume you can purchase A Big Mac in the US for $5.36 and a Big Mac in China for 9.90 Yuan and the actual exchange rate for the Chinese Yuan is 7.74 per US dollar. According to Purchasing Power Parity, calculate:
- What do we expect to pay?
9.90 yuan for the big mac
- What is the price in dollars?
$1.28
- What should the exchange be? (This is the IPPP)
- What percentage is the DKK under or overvalued against the dollar?
- What percentage is the dollar undervalued or overvalued in relation to the DKK?
12) If the spot rate is CHF 1.600=$1 USD, and the expected inflation rates for Switzerland and the United States are 3% and 5% respectively, the
- USD is expected to
depreciate versus the CHF - USD is expected to appreciate versus the CHF
- CHF is expected to depreciate versus the USD
- CHF is expected to remain the same versus the USD
- JPY would probably appreciate versus the USD and CHF
13) Drawing on the 3 U.S. methods of treatment of foreign corporate income tax, calculate the net income after tax:
Income: $175
Foreign tax at 39%
U.S. tax at 40%
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Credit |
Deduction |
Double |
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Income earned by the foreign corporation
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Calculate net income after tax |
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14) Calculate the cumulative VAT on a leather jacket in Italy. Show the VAT generated at each stage of production.
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Stage of Production |
Selling Price
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Value Added at 10% |
Cumulative VAT |
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RAW MATERIAL |
50 EUR |
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MANUFACTURING |
200 EUR |
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ASSEMBLY |
400 EUR |
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RETAILER |
625 EUR |
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15) Calculate the cumulative VAT on a loaf of bread in Canada. Show the VAT generated at each stage of production.
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Stage of Production |
Selling Price
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Value Added at 15% |
Cumulative VAT |
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FARMER |
$ .50 |
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MILLER |
$2 .75 |
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WHOLESALER |
$3.10 |
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RETAILER |
$3.90 |
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16) Define the 3 major ways to reduce foreign exchange risk including (1) Transaction, (2) Economic, and (3) Translation Exposure and provide examples of how a manager could reduce each type of risk.
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