Chapter 12, Problem 3IEE

Imagine an American MNC. Why it might decide to borrow in a country such as Brazil, where interest rates are high, rather than a country like Germany, where interest rates are low? Discuss why this may be the best strategy for the firm, given your understanding of the relationship between inflation, interest rates, and exchange rate.

Jack Smith is concerned that the pound may depreciate substantially over the next month, but he also believes that the pound could appreciate substantially if specific situations occur. Should Jack use currency futures or currency options to hedge the exchange rate risk? Is there any disadvantage of selecting this method for hedging?

In one sense, international investing may be viewed as no more than a straight-forward generalisation of portfolio selection in a domestic market on the other hand, international investments pose problems not encountered in domestic markets. (a) In what ways can the challenges and problems of international investing be mitigated or managed? Outline and discuss the approaches in detail. (b)An investment in risk-free British government securities paying 10% annual interest in British pounds is made by an American investor who starts with $ 20 000. The current exchange rate is $2 per pound. At the end of the year the pound depreciates against the dollar. Calculate the investor’s return in both dollar and pound what if the exchange rate is $2.00, and $2.20?

Which of the following best describes the terms 'long forward position' and 'short forward position' in foreign exchange trading?   A short forward position is holding a currency for a short duration, while a long forward position is holding it for a longer period.   A short forward position means you have agreed to sell a currency in the future, while a long forward position means you have agreed to buy it in the future.   A long forward position is when you expect the currency's future spot rate to decrease, and a short forward position is when you expect it to increase.   A long forward position means you have agreed to sell a currency in the future, and a short forward position means you have agreed to buy it in the future.

Which of the following statements are true about exchange rate risk? Check all that apply: A Canadian investor with an investment in U.S Treasury bills faces exchange rate risk. Exchange rate risk arises from the uncertainty in asset returns due to changes in the exchange rate between the currency of the investor and the foreign currency. Exchange rate risk can't be perfectly hedged, even if the return earned in the foreign currency is known beforehand. Exchange rate risk can be hedged using a futures or forward contract in foreign exchange. Submit

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should: A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. B. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. C. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. D. sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.