Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 27, Problem 5PS
Summary Introduction
To determine: The missing figures.
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Consider the following table, which reports the spot exchange rate between the dollar and the pound, as well as the interest rates in the UK and the US (standard notation applies): 5 S/£ exchange rate r UK (%)r US (%) spot S1.1122/£1 1 month 2.1 2.1 3 month 2.5 2.9 6 month 2.9 4 1 year 4.1 4.5 Showing all your calculations, evaluate the 1 - month, 1-year, 3- month, and 6-month forward exchange rate between the pound and the dollar.
TIPS FOR READING AN EXCHANGE RATE CHART: Read down the chart. For example, in column 1 it says the US Dollar is equal to each of the currencies below it. Therefore $1 = .76 £ or $1 = .89 €.
Exchange Rate Table for Month 1
US Dollar
$1 =
British Pound
1 £ =
Chinese Yuan
1 Y =
Japanese Yen
1 ¥ =
Euro
1€
US Dollar
---
1.32
.16
.0088
1.13
British Pound
.76
---
.12
.0067
.85
Chinese Yuan
6.37
8.46
---
.056
7.21
Japanese Yen
113.04
149.55
17.75
---
127.55
Euro
.89
1.17
.14
.0078
---
Exchange Rate Table for Month 2
US Dollar
$1 =
British Pound
1 £ =
Chinese Yuan
1 Y =
Japanese Yen
1 ¥ =
Euro
1€
US Dollar
---
1.40
.20
.0080
1.17
British Pound
.70
---
.11
.0065
.89
Chinese Yuan
6.20
8.72
---
.062
7.59
Japanese Yen
116.24
146.89
16.32
---
117.2
Euro
.92
1.11
.15
.0078
---
An American company contracts a…
TIPS FOR READING AN EXCHANGE RATE CHART: Read down the chart. For example, in column 1 it says the US Dollar is equal to each of the currencies below it. Therefore $1 = .76 £ or $1 = .89 €.
Exchange Rate Table for Month 1
US Dollar
$1 =
British Pound
1 £ =
Chinese Yuan
1 Y =
Japanese Yen
1 ¥ =
Euro
1€
US Dollar
---
1.32
.16
.0088
1.13
British Pound
.76
---
.12
.0067
.85
Chinese Yuan
6.37
8.46
---
.056
7.21
Japanese Yen
113.04
149.55
17.75
---
127.55
Euro
.89
1.17
.14
.0078
---
Exchange Rate Table for Month 2
US Dollar
$1 =
British Pound
1 £ =
Chinese Yuan
1 Y =
Japanese Yen
1 ¥ =
Euro
1€
US Dollar
---
1.40
.20
.0080
1.17
British Pound
.70
---
.11
.0065
.89
Chinese Yuan
6.20
8.72
---
.062
7.59
Japanese Yen
116.24
146.89
16.32
---
117.2
Euro
.92
1.11
.15
.0078
---
A currency depreciates (or gets…
Chapter 27 Solutions
Principles of Corporate Finance
Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PSCh. 27 - Prob. 4PSCh. 27 - Prob. 5PSCh. 27 - Prob. 6PSCh. 27 - Prob. 8PSCh. 27 - Prob. 9PSCh. 27 - Prob. 10PSCh. 27 - Currency risk Companies may be affected by changes...
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- Use the information below to answer the following questions. Currency per U.S. $ 1.2380 1.2353 Australia dollar 6-months forward Japan Yen 6-months forward U.K. Pound 6-months forward 100.3600 100.0200 .6789 .6784 Suppose interest rate parity holds, and the current six month risk-free rate in the United States is 5 percent. Use the approximate interest rate parity equation to answer the following questions. a. What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Australian risk-free rate b. Japanese risk-free rate c. Great Britain risk-free rate c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % % %arrow_forwardTIPS FOR READING AN EXCHANGE RATE CHART: Read down the chart. For example, in column 1 it says the US Dollar is equal to each of the currencies below it. Therefore $1 = .76 £ or $1 = .89 €. Exchange Rate Table for Month 1 US Dollar $1 = British Pound 1 £ = Chinese Yuan 1 Y = Japanese Yen 1 ¥ = Euro 1€ US Dollar --- 1.32 .16 .0088 1.13 British Pound .76 --- .12 .0067 .85 Chinese Yuan 6.37 8.46 --- .056 7.21 Japanese Yen 113.04 149.55 17.75 --- 127.55 Euro .89 1.17 .14 .0078 --- Exchange Rate Table for Month 2 US Dollar $1 = British Pound 1 £ = Chinese Yuan 1 Y = Japanese Yen 1 ¥ = Euro 1€ US Dollar --- 1.40 .20 .0080 1.17 British Pound .70 --- .11 .0065 .89 Chinese Yuan 6.20 8.72 --- .062 7.59 Japanese Yen 116.24 146.89 16.32 --- 117.2 Euro .92 1.11 .15 .0078 --- An American family goes on vacation…arrow_forwardUse the information below to answer the following questions. U.K. Pound 6-months forward (£) Japan Yen 6-months forward () Switzerland Franc 6-months forward (SF) Currency per U.S. $ 0.5135 0.5204 108.21 106.96 1.0492 1.0478 Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 4.6 percent. What must the six-month risk-free rate be in Great Britain? 4arrow_forward
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