International Financial Management
International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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The prevailing one-year risk-free interest rate in Argentina is higher than in the U.S. and will continue to be higher over time. Sycamore Co. believes the international Fisher effect (IFE) can be used to derive the best forecast of the peso's exchange rate movement over time. In contrast, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? Briefly explain.
Suppose the real exchange rate is constant – say, at the level required for net exports (or the current account) to equal zero. In this case, if foreign inflation is higher than domestic inflation, what must happen to the nominal exchange rate over time?
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?
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  • Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate? Does the forward rate reflect a forecast of appreciation or depreciation of the Mexican peso? Explain how the degree of the expected change implied by the forward rate forecast is tied to the interest rate differential. Do you think that today’s forward rate or today’s spot rate of the peso provides a better forecast of the future spot rate of the peso?
    Suppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets:   GBP/USD spot: 1.6465   March futures: 1.6425   September futures: 1.6250   December futures: 1.6130   The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?
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