major COL ason is that increases in the val our imports negatively, whilst it au obtain the following spot exc
major COL ason is that increases in the val our imports negatively, whilst it au obtain the following spot exc
Chapter10: Measuring Exposure To Exchange Rate Fluctuations
Section: Chapter Questions
Problem 3ST
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Question
Transcribed Image Text:You are the manager of a U.S. company situated in Los Angeles and manages the import/export
division of the company. The company distributes (resells) a variety of consumer products imported
to the U.S.A from Europe and also exports goods manufactured in the U.S.A. to Canada.
Therefore, your company is very much dependent an the impact of current and future exchange
rates on the performance of the company.
Scenario 1:
You have to estimate the expected exchange rates between your home currency and the other
currencies of the major other countries that you deal with in terms of bath imports and exparts. The
reason is that increases in the values of other currencies compared to the U.S. Dollar may impact
your imports negatively, whilst it may on the other hand, be good for exports. To do this estimate,
you obtain the following spot exchange rate information:
€/S
CADS/S
0.87616
1.30779
You also obtain the following annual risk free rates applying in the countries:
U.S.A.
2.660%
France
0.500%
Canada
2.155%
Your focus is presently to estimate the 3 month forward rates in order to consider the impact that it
will have on the import and export sales of the company. Calculate the forward rates of the $ in
terms of all the currencies by using simple interest rate parity eg. 10% annual interest rate = 10/2 =
5% for six months. Do not effective annual interest rate compounding. Show all your workings in
table 1 on the separate answer sheet by using the correct formula provided in your formula sheet.
Provide an indication about what will happen to the value of the US$ based an the forward
exchange rate calculations by calkulating the expected discount/premium of it for each of the
currencies in Table 2 on the separate answer sheet. Also show whether the impact will be positive
{P| ar negative (N) for imports and exports. For example:
Exchange
% Discount/Premium
Import
Екроrt
rate
Warkings by you
Positive
Negative
=1.93% premium
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