For the last year, Blades, Inc., has been exporting its products to Thailand to supplement its declining U.S. sales. Under the existing arrangement, Blades sells 180,000 pairs of roller blades annually to Entertainment Products, a Thai retailer, for a fixed price denominated in will purchase 200,000 pairs of Speedos, Blades’ primary product, annually at a fixed price of £80 per pair. Blades’ suppliers of the needed components for its roller blades production are located primarily in the United States, where Blades incurs the majority of its cost of goods sold. Although prices for inputs needed to manufacture roller blades vary, recent costs have run approximately $70 per pair. Blades also imports components from Thailand because of the relatively low local prices of rubber and plastic components and because of those components’ high quality. These imports are denominated in Thai baht, and the exact price (in baht) depends on prevailing market prices for these components in Thailand. Currently, inputs sufficient to manufacture a pair of roller blades cost approximately 3,000 Thai baht per pair of roller blades. Although Thailand had been among the world’s fastest-growing economies, recent events in that country have increased the level of economic uncertainty. Specifically, the Thai baht, which had been pegged to the dollar, is now a freely floating currency and has depreciated substantially in recent months. Furthermore, recent levels of inflation in Thailand have been very high. Hence, future economic conditions in Thailand are highly uncertain. Ben Holt, Blades’ chief financial officer (CFO), is seriously considering DFI in Thailand. He believes that this is a perfect time to either establish a subsidiary or acquire an existing business in Thailand because the uncertain economic conditions and the depreciation of the baht have substantially lowered the initial costs required for DFI. Holt believes the growth potential in Asia will be extremely high once the Thai economy stabilizes. Although Holt has also considered DFI in the United Kingdom, he would prefer that Blades invest in Thailand as opposed to the United Kingdom. Forecasts indicate that the demand for roller blades in the United Kingdom is similar to that in the United States; because Blades’ U.S. sales have recently declined due to the high prices it charges, Holt expects that DFI in the United Kingdom will yield similar results, especially as the components required to manufacture roller blades are more expensive in the United Kingdom than in the United States. Furthermore, both domestic and foreign roller blades manufacturers are relatively well established in the United Kingdom, so the growth potential there is limited. Holt believes the Thai roller blades market offers more growth potential. Blades can sell its products at a lower price but generate higher profit margins in Thailand than it can in the United States. This outcome will occur because the Thai customer has committed itself to purchase a fixed number of Blades’ products annually only if it can purchase Speedos at a substantial discount from the U.S. price. Nevertheless, because the cost of goods sold incurred in Thailand is substantially lower than that incurred in the United States, Blades has managed to generate higher profit margins from its Thai exports and imports than in the United States. As a financial analyst for Blades, Inc., you generally agree with Holt’s assessment of the situation. However, you are concerned that Thai consumers have not been affected yet by the unfavorable economic conditions. You believe that they may reduce their spending on leisure products within the next year. Therefore, you think it would be beneficial to wait until next year, when the unfavorable economic conditions in Thailand may subside, to make a decision regarding DFI in Thailand. However, if economic conditions in Thailand improve over the next year, DFI may become more expensive both because target firms will be more expensive and because the baht may appreciate. You are also aware that several of Blades’ U.S. competitors are considering expanding into Thailand in the next year. If Blades acquires an existing business in Thailand or establishes a subsidiary there by the end of next year, it would fulfill its agreement with Entertainment Products for the subsequent year. The Thai retailer has expressed an interest in renewing the contractual agreement with Blades at that time if Blades establishes operations in Thailand. However, Holt believes that Blades could charge a higher price for its products if it establishes its own distribution channels. Holt has asked you to answer the following questions: 1. Identify and discuss some of the benefits that Blades, Inc., could obtain from DFI. 2. Do you think Blades should wait until next year to undertake DFI in Thailand? What is the trade-off if Blades undertakes the DFI now? 3. Do you think Blades should renew its agreement with the Thai retailer for another three years? What is the trade-off if Blades renews the agreement? 4. Assume a high level of unemployment in Thailand and a unique production process employed by Blades, Inc. How do you think the Thai government would view the establishment of subsidiaries in Thailand by firms such as Blades? Do you think the Thai government would be more or less supportive if firms such as Blades acquired existing businesses in Thailand? Why?
> Investors based in the United States can earn 11 percent interest on a oneyear bank deposit in Argentina (with no default risk) or 2 percent on a one-year bank deposit in the United States (with no default risk). Assess the following statement: “Accordin
> You believe that the future value of the Australian dollar will be determined by purchasing power parity. You expect that inflation in Australia will be 6 percent next year, whereas inflation in the United States will be 2 percent next year. Today the sp
> The one-year Treasury (risk-free) interest rate in the United States is presently 6 percent, whereas the one-year Treasury interest rate in Switzerland is 13 percent. The spot rate of the Swiss franc is $0.80. Assume that you believe in the international
> Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The United States and Canada presently have the same nominal (quoted) interest rate. The central bank of Canada just made an announcement that causes you to rev
> Assume that you believe purchasing power parity exists. You expect that inflation in Canada during the next year will be 3 percent and inflation in the United States will be 8 percent. Today the spot rate of the Canadian dollar is $0.90 and the one-year
> Recall that Ben Holt, Blades’ chief financial officer (CFO), has suggested to the board of directors that Blades proceed with the establishment of a subsidiary in Thailand. Due to the high growth potential of the roller blades market in Thailand, his ana
> 1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It expects that inflation in countries using the euro will
> Assume the value of the Hong Kong dollar (HK$) is tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $0.50 and HK$3.9. The one-year interest rate on the Aust
> Inflation differentials between the United States and other industrialized countries have typically been a few percentage points in any given year. Yet, in many years annual exchange rates between the corresponding currencies have changed by 10 percent o
> The nominal (quoted) U.S. one-year interest rate is 6 percent, whereas the nominal one-year interest rate in Canada is 5 percent. Assume you believe in purchasing power parity. You believe that the real one-year interest rate is 2 percent in the United S
> The United States and the country of Rueland have the same real interest rate of 3 percent. The expected inflation over the next year is 6 percent in the United States versus 21 percent in Rueland. Interest rate parity exists. The one-year currency futur
> Today, a U.S. dollar can be exchanged for three New Zealand dollars. The one-year CD (deposit) rate in New Zealand is 7 percent, and the one-year CD rate in the United States is 6 percent. Interest rate parity exists between the United States and New Zea
> The Argentine one-year CD (deposit) rate is 13 percent, while the Mexican one-year CD rate is 11 percent and the U.S. one-year CD rate is 6 percent. All CDs have zero default risk. Interest rate parity holds, and you believe that the international Fisher
> Today’s spot rate of the Mexican peso is $0.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, whereas Mexican inflation over this year is expected to be 3 percent. Wake Forest Co. plans to
> The U.S. three month interest rate (unannualized) is 1 percent. The Canadian three-month interest rate (unannualized) is 4 percent. Interest rate parity exists. The expected inflation over this period is 5 percent in the United States and 2 percent in Ca
> You believe that interest rate parity and the international Fisher effect hold. Assume that the U.S. interest rate is presently much higher than the New Zealand interest rate. You have receivables of 1 million New Zealand dollars that you will receive in
> Jim Logan, owner of the Sports Exports Company, has been pleased with his success in the United Kingdom. He began his business by producing footballs and exporting them to the United Kingdom. Although American-style football is still not nearly as popula
> Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is £0.3. You expect the one-yea
> Assume that Mexico has a one-year interest rate that is higher than the U.S. one-year interest rate. Assume that you believe in the international Fisher effect and interest rate parity. Assume zero transaction costs. Ed is based in the United States and
> Assume that the inflation rates of the countries that use the euro are very low, whereas other European countries that have their own currencies experience high inflation. Explain how and why the euro’s value could be expected to change against these cur
> Explain how you could determine whether PPP exists. Describe a limitation in testing whether PPP holds.
> Would PPP be more likely to hold between the United States and Hungary if trade barriers were completely removed and if Hungary’s currency were allowed to float without any government intervention? Would the IFE be more likely to hold between the United
> Describe a statistical test for the IFE.
> How could you use regression analysis to determine whether the relationship specified by PPP exists, on average? Specify the model, and describe how you would assess the regression results to determine if there is a significant difference from the relati
> The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $0.14. a. What is the forward rate premium? b. Wh
> Assume the following information is available for the United States and the eurozone: a. Does IRP hold? b. According to PPP, what is the expected spot rate of the euro in one year? c. According to the IFE, what is the expected spot rate of the euro in
> Beth Miller does not believe that the IFE holds. Current one-year interest rates in Europe are 5 percent, whereas one-year interest rates in the United States are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she
> Because Ben Holt, Blades’ chief financial officer, believes the growth potential for the roller blades market in Thailand is very high, he has decided to invest in Thailand. This investment would involve establishing a subsidiary in Bangkok consisting of
> Given the conversion of several European currencies to the euro, explain what would cause the euro’s value to change against the dollar according to the IFE.
> Brazil commonly has a much higher nominal interest rate than the United States. Yet, some large institutional investors do not invest in Brazilian money market securities, even when they believe the securities have no credit (default) risk. Use the IFE t
> Russia commonly experiences a high rate of inflation. a. Explain why the high Russian inflation typically places severe downward pressure on the value of the Russian ruble. b. In some periods, the Russian government intervenes in the foreign exchange m
> As of today, assume the following information is available: a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year. b. Use the differential in expected inflation to forecast the percentage change in the Mexican
> Explain the rationale underlying PPP theory.
> Assume that the spot exchange rate of the Singapore dollar is $0.70. The one-year interest rate is 11 percent in the United States and 7 percent in Singapore. What will the spot rate be in one year according to the IFE? Which force causes the spot rate t
> Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?
> How is it possible for PPP to hold if the IFE does not?
> Assume that the inflation rate in Brazil is expected to increase substantially. How will this affect Brazil’s nominal interest rates and the value of its currency (the real)? If the IFE holds, how will the nominal return to U.S. investors who invest in B
> IFE Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreign interest rates? Why do some investors continue to invest overseas, even when they have no other transactions overseas?
> Jim Logan’s business, the Sports Exports Company, continues to grow. His primary product is the footballs he produces and exports to a distributor in the United Kingdom. However, his recent joint venture with a British firm has also been successful. Unde
> Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in the United States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these
> Japan has typically had lower inflation than the United States has. How would one expect this to affect the Japanese yen’s value? Why does this expected relationship not always occur?
> The currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S.-based MNCs use forward contracts to hedge their futu
> Assume that several European countries that use the euro as their currency experience higher inflation than the United States does, while two other European countries that use the euro as their currency experience lower inflation than the United States d
> investors in the United States and Canada require the same real interest rate, and the nominal rate of interest is 2 percent higher in Canada, what does this imply about expectations of U.S. inflation and Canadian inflation? What do these inflationary ex
> Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation?
> Explain the concept of interest rate parity. Provide the rationale for its possible existence
> The terrorist attacks on the United States on September 11, 2001, led to expectations of a weaker U.S. economy. Explain how such expectations could have affected U.S. interest rates and, therefore, the forward rate premium (or discount) on various foreig
> Assume the following information Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer.
> Assume the following information: Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1 million.) What market forces would occur to eliminate any furth
> Assume that the one-year interest rate in Canada is 4 percent. The one-year U.S. interest rate is 8 percent. The spot rate of the Canadian dollar (C$) is $0.94. The forward rate of the Canadian dollar is $0.98. a. Is covered interest arbitrage feasible f
> Assume that interest rate parity holds and will continue to hold in the future. At the beginning of the month, the spot rate of the British pound is $1.60, while the one-year forward rate is $1.50. Assume that U.S. annual interest rate remains steady ove
> Today, the annualized interest rate in the United States is 4 percent for any debt maturity. The annualized interest rate in Australia is 4 percent for debt maturities of three months or less, 5 percent for debt maturities between three months and six mo
> Assume that the one-year interest rate in the United Kingdom is 9 percent, whereas the one-year interest in the United States is 4 percent. The spot rate of the pound is $1.50. Assume that interest rate parity exists. The quoted one-year interest in the
> As of now, the nominal interest rate is 6 percent in the United States and 6 percent in Australia. The spot rate of the Australian dollar is $0.58, whereas the oneyear forward rate of the Australian dollar exhibits a discount of 2 percent. Assume that as
> Interest rate parity exists between the United States and Poland (its currency is the zloty). The one-year risk-free CD (deposit) rate in the United States is 7 percent. The one-year risk-free CD rate in Poland is 5 percent; it is denominated in zloty. A
> You obtain the following quotes from different banks. One bank is willing to buy or sell Japanese yen at an exchange rate of 110 yen per dollar. A second bank is willing to buy or sell the Argentine peso at an exchange rate of $0.37 per peso. A third ban
> Assume that interest rate parity exists and will continue to exist. As of this morning, the one-month interest rate in the United States was higher than the one-month interest rate in the eurozone. Assume that as a result of the European Central Bank’s m
> Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible.
> Biscayne Co. will be receiving Mexican pesos today and will need to convert them into Australian dollars. Today, a U.S. dollar can be exchanged for 10 Mexican pesos. An Australian dollar is worth one-half of a U.S. dollar. a. What is the spot rate of a M
> Jim Logan, owner of the Sports Exports Company, remains concerned about his exposure to exchange rate risk. Even if he hedges his transactions from one month to another, he recognizes that a long-term trend of depreciation in the British pound could have
> Alabama Bank is willing to buy or sell British pounds for $1.98. The bank is willing to buy or sell Mexican pesos at an exchange rate of 10 pesos per dollar. It is willing to purchase British pounds at an exchange rate of 1 peso 0 5 .05 British pound. Sh
> A bank is willing to buy dollars for 0.9 euro per dollar. It is willing to sell dollars for 0.91 euro per dollar. Also consider the following information: You can sell Australian dollars (A$) to the bank for $0.72. You can buy Australian dollars from the
> Assume that the annual U.S. interest rate is currently 8 percent, whereas Japan’s annual interest rate is currently 7 percent. The spot rate of the Japanese yen is $0.01. The one-year forward rate of the Japanese yen is $0.01. Assume that as covered inte
> Assume that interest rate parity exists, along with the following information: Spot rate of Swiss franc 5 $0.80 6-month forward rate of Swiss franc $ 5 0.78 12-month forward rate of Swiss franc $ 5 0.81 Assume that the annualized U.S. interest rate is 7
> Earlier this morning, the annual U.S. interest rate was 6 percent, whereas Mexico’s annual interest rate was 8 percent. The spot rate of the Mexican peso was $0.16. The one-year forward rate of the peso was $0.15. Assume that as covered interest arbitrag
> Assume zero transaction costs. As of now, the Japanese oneyear interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $0.0090 and the one-year forward rate of the Japanese yen is $0.0097. a. Det
> Today, the one-year U.S. interest rate is 4 percent, while the corresponding rate in Argentina is 17 percent. The spot rate of the Argentine peso (AP) is $0.44. The one-year forward rate of the AP exhibits a 14 percent discount. Determine the yield (perc
> Assume that interest rate parity exists. The spot rate of the Argentine peso is $0.40. The one-year interest rate in the United States is 7 percent; the comparable rate is 12 percent in Argentina. Assume the futures price is equal to the forward rate. An
> Assume that interest rate parity exists. The 6-month forward rate of the Swiss franc has a premium, whereas the 12-month forward rate of the Swiss franc has a discount. What does this tell you about the relative level of Swiss interest rates versus U.S.
> Assume the following information: Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1 million to use. What market forces woul
> Blades, Inc., has been exporting to Thailand since it made the decision to supplement its declining U.S. sales by exporting its roller blades to that country. Furthermore, Blades has recently begun exporting its products to a retailer in the United Kingd
> Assume that interest rate parity exists, along with the following information: Spot rate of British pound 5 $1.80 6-month forward rate of pound 5 $1.82 12-month forward rate of pound 5 $1.78 a. Is the annualized 6-month U.S. risk-free interest rate grea
> Assume that interest rate parity exists and will continue to exist. As of today, the one-year interest rate in Singapore is 4 percent; the corresponding rate is 7 percent in the United States. The Singapore central bank is expected to decrease interest r
> Assume that the spot rate of the Brazilian real is $0.30 today. Also assume that interest rate parity exists. Obtain the interest rate data you need from Bloomberg.com to derive the one-year forward rate premium (or discount), and then determine the one-
> Assume that interest rate parity exists. As of this morning, the one-month interest rate in Canada was lower than the one-month interest rate in the United States. Assume that as a result of the Fed’s monetary policy this afternoon, the one-month interes
> Assume that the annual U.S. interest rate is currently 6 percent, whereas Germany’s annual interest rate is currently 8 percent. The spot rate of the euro is $1.10 and the one-year forward rate of the euro is $1.10. Assume that as covered interest arbitr
> Assume that cross exchange rates are always properly aligned, such that triangular arbitrage is not feasible. While at the Miami airport today, you notice that a U.S. dollar can be exchanged for 125 Japanese yen or 4 Argentine pesos at the foreign exchan
> You are given these quotes by the bank: You can sell Canadian dollars (C$) to the bank for $0.70. You can buy Canadian dollars from the bank for $0.73. The bank is willing to buy dollars for 0.9 euro per dollar. The bank is willing to sell dollars for 0.
> You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for 0.9 euro The bank will pay you 0.8 euro for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The
> Assume that interest rate parity exists. The one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the Australian dollar is $0.60. You will need 10 million
> The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the United States is 6 percent. The spot rate of the Singapore dollar (S$) is $0.50 and the forward rate of the S$ is $0.46. Assume zero transaction costs. a. Does inter
> Jim Logan, owner of the Sports Exports Company, will be receiving about 10,000 British pounds about one month from now as payment for exports produced and sent by his firm. Logan is concerned about his exposure Jim Logan, owner of the Sports Exports Comp
> Explain the concept of triangular arbitrage and the scenario necessary for it to be plausible.
> At the end of this month, you (the owner of a U.S. firm) are meeting with a Japanese firm to which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward contract to hedge the future receivables in yen. As of thi
> The interest rate in Indonesia is commonly higher than the interest rate in the United States, which reflects a high expected rate of inflation there. Why should Nike’s Indonesia-based division consider hedging its future remittances from that country to
> Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $0.70, whereas the one-year forward rate is $0.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, t
> If the U.S. interest rate is close to zero, while the interest rate of Russia is very high, what would interest rate parity suggest about the forward rate of the Russian ruble? Explain.
> Describe a method for testing whether interest rate parity exists. Why are transaction costs, currency restrictions, and differential tax laws important when evaluating whether covered interest arbitrage can be beneficial?
> Assume that the 30-day forward premium of the euro is 1 percent, while the 90-day forward premium of the euro is 2 percent. Explain the likely interest rate conditions that would cause these premiums. Do these conditions ensure that covered interest arbi
> Assume that Mexico’s economy has expanded significantly, creating a high demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican peso?
> The following information is available: You have $500,000 to invest. The current spot rate of the Moroccan dirham is $0.110. The 60-day forward rate of the Moroccan dirham is $0.108 The 60-day interest rate in the United States is 1 percent. The 60-day
> Assume that annual interest rates in the United States are 4 percent, whereas interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or discount of the euro be? b. If the euro’s spot rate is $1.10, what should
> Blades, Inc., has recently decided to expand its international trade relationship by exporting its roller blades to the United Kingdom. Jogs, Ltd., a British retailer, has committed itself to the annual purchase of 200,000 pairs of Speedos, Bladesâ
> The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the United States are 3 percentage points higher than in South Africa. Based on this information, is covered interest arbitrage possible for a U.S. investor if
> Assume the following information: Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1 million to use. What market forces would occu
> Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent. a. Does interest rate parity exist? b. Can a U.S. f
> Assume that the one-year U.S. interest rate is 11 percent, whereas the one-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you one year from now at a discount of 13 percent. W
> The one-year interest rate in New Zealand is 6 percent. The one-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dollar is $0.54. Is covered interest arbitrage feasible for
> If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by U.S. firms. Do you agree or disagree with this statement? Explain.
> Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month?
