a)
To determine: Whether the dollar is sold at a discount that is relative to a franc or at a premium.
Introduction:
The price of a country’s currency in relative to the of another nation’s currency is the exchange rate. The rate of exchange can be either floating or fixed. The two components of the exchange rates are the foreign currency and the domestic currency.
b)
To determine: Whether the financial market expect the value of franc to strengthen comparatively to the value of a dollar.
Introduction:
The market where the people trade the securities and commodities is a financial market. The main function of the financial market is to borrow and lend.
c)
To determine: The true suspect of the relative economic conditions in Country U and in Country S
Introduction:
The present state of the economy in a region or a country is the economic conditions.
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EBK FUNDAMENTALS OF CORPORATE FINANCE A
- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardMCQ & True/false : International Financial Management: 1. Changes in relative inflation rates can affect international trade activity, which influences the demand for and supply of currencies and therefore influences exchange rates. (a) True (b) False 2. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% premium. Today’s spot rate of the Canadian dollar is £0.47. The spot rate forecasted for one year ahead is: (a) £0.4418 (b) £0.3418 (c) £0.4982 (d) £0.5418 3. A currency call option grants the right to buy a specific currency at a designated price within a specific period of time. (a) True (b) Falsearrow_forwardConsider the following returns: Period United States {:[" United "],[" Kingdom "]:} Exchange Rate 1 10% 5% $3 2 15% -5% 2.5 3 -5% 15% 2.5 4 12% 8% 2 5 6% 10% 1.5 6 2.5 Note that the exchange rate is stated as beginning of period dollars for pounds. What is the average return in each market from the point of view of a US investor and of a UK investor? 6. Given the data in problem 1 , what is the standard deviation of return from the point of view of a US investor and of a UK investor?arrow_forward
- Q. 4 Suppose the annual interest rate in Australia is 1.5% and the interest rate in the United States is 2%. Suppose the spot USD/AUD exchange rate is $73/AUD and the exchange rate on a futures contract for delivery in one year’s time is $75/AUD. (a) Suppose Australian Reserve Bank increases the cash rate, causing Australian interest rates to rise. All else equal, would the USD/AUD exchange rate increase, decrease, or stay the same? (b) An investor wants to save $6,000 USD for a year and is looking for the option with the highest guaranteed return in USD. Would an investor prefer to save $6,000 USD for a year in the United States or in Australia? To support your answer, calculate the profits under each scenario. (c) Does the interest rate parity hold? Provide a calculation to support your answer.arrow_forward2. Consider the following returns: Period United States United Kingdom Exchange Ratea 1 10% 5% $3 2 15% -5% 2.5 3 -5% 15% 2.5 4 12% 8% 2.0 5 6% 10% 1.5 6 2.5 What is the average return in each market from the point of view of a U.S. investor and of a U.K. investor?arrow_forwardInternational Finance (chapter 21) Question Explain how each of the following will affect the relative values of the dollar and the French franc: Income growth higher in the United States than in France. Inflation higher in France than in the United States. A real interest rate higher in the United States than in France PLease solve 1arrow_forward
- 9 14. Assume you fully believe that any movements in the exchange rate can be predicted using the inflation rate differential between countries (i.e., you believe in the purchasing power parity). You collect some data on Chile and Paraguay and find that the two countries have the same nominal interest rate. However, the central bank of Paraguay just made an announcement suggesting a downward revise of the real interest rate with no expected change in the nominal interest rate. Based on this information, what do you think will be the effect on the Paraguayan guaraní (the Paraguayan currency)? Will it appreciate, depreciate, or remain constant? Explain briefly your reasoning. Please answer Quickly and I will give the question a likearrow_forwardA. Suppose the dollar interest rate and the euro interest rate are the same and equal 2 percent per year. Suppose the expected future $/€ exchange rate is $1.20 per 1 €. Suppose now Euro interest rate decreases to 1 percent per year. Determine how the new equilibrium $/€ exchange rate will change if the US interest rate remains constant. B. Indicate how the change in the Euro interest rate will affect the equilibrium $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.arrow_forward
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