Question: The September 11, 2001, terrorist attacks on

> The Central Bank of Poland is about to engage in indirect intervention later today, by which it will lower Poland’s interest rates substantially. This will have an impact on the value of the Polish currency (zloty) against most currencies because it will

> Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales, if there are any) over the next year. Ignore any tax effects. Each firm has the same level of expec

> Zemart is a U.S. firm that plans to establish an international business in which it will export goods to Mexico (these exports will be denominated in pesos) and to Canada (these exports will be denominated in Canadian dollars) once a month and, therefore

> What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that would reduce transaction exposure.

> Assume that the Mexican peso and the Brazilian currency (the real) have depreciated against the U.S. dollar recently due to the high inflation rates in those countries. Assume that inflation in these two countries is expected to continue and that it will

> Washington Co. and Vermont Co. have no domestic business. Both have a similar dollar equivalent amount of international exporting business. Washington Co. exports all of its products to Canada, whereas Vermont Co. exports its products to Poland and Mexic

> Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is approximately $0.70 and the present exchange rate of the pound is $1.90. Raton Co

> Celtic Co. is a U.S. firm that exports its products to England. It faces competition from many firms in England. Its prices to customers in England have generally been lower than those of the U.K. competitors, primarily because the British pound has been

> In 2016, the United Kingdom decided to leave the European Union (a decision referred to as Brexit). Many analysts have made arguments about how this event will affect firms in the United Kingdom. Assume that the pound’s value relative to the euro is like

> Cornhusker Co. is an exporter of products to Singapore. It wants to know how its stock price is affected by changes in the Singapore dollar’s exchange rate. The firm believes that the impact may occur with a lag of one to three quarters. How could regres

> Recall that Blades, Inc., is considering the establishment of a subsidiary in Thailand to manufacture Speedos, Blades’ primary roller blades product. Alternatively, Blades could acquire an existing manufacturer of roller blades in Thail

> The Walt Disney Company built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate movements? Think carefully before you give your final answer. There is more than one way

> Using the cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and cash flow items would be affected by three possible exchange rate scenarios for the New Zealand dollar ( ) NZ$ : (1) NZ$ $ 5 0.50, (2) NZ$ $

> Vegas Corp. is a U.S. firm that exports most of its products to Canada. Historically, the firm invoiced its products in Canadian dollars to accommodate the importers. However, it was adversely affected when the Canadian dollar weakened against the U.S. d

> a. How can a U.S. company use regression analysis to assess its economic exposure to fluctuations in the British pound? b. In using regression analysis to assess the sensitivity of cash flows to exchange rate movements, what is the purpose of breaking

> Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year: Danish krone inflows equal DK50,000,000, while outflows equal DK40,000,000; British pound inflows equal £2,000,000, w

> Erie Co. has most of its business in the United States, but exports some products to Belgium. Its exports were invoiced in euros (Belgium’s currency) last year. The firm has no other economic exposure to exchange rate risk. Its main competition when sell

> Periodically, rumors swirl that China will weaken its currency (the yuan) against the U.S. dollar and many European currencies. This causes investors to sell stocks in Asian countries such as Japan, Taiwan, and Singapore. Offer an intuitive explanation f

> Cieplak, Inc., is a U.S.-based MNC that has expanded into Asia. Its U.S. parent exports goods to some Asian countries, with its exports denominated in the Asian currencies. It also has a large subsidiary in Malaysia that serves that market. Offer at leas

> Toyota Motor Corp. measures the sensitivity of its exports to the yen exchange rate (relative to the U.S. dollar). Explain how regression analysis could be used for such a task. Identify the expected sign of the regression coefficient if Toyota primarily

> Boulder, Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Boulder not benefit from a stronger euro?

> The Sports Exports Company has considered a variety of projects, but all of its business is still in the United Kingdom. Because most of its business comes from exporting footballs (with revenues being denominated in pounds), it remains exposed to exchan

> Sooner Co. is a U.S. wholesale company that imports expensive, highquality luggage and sells it to retail stores around the United States. Its main competitors also import high-quality luggage and sell it to retail stores. None of these competitors hedge

> Lubbock, Inc., produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the United States. How will Lubbock be affected if Brazil’s currency (the real)

> Longhorn Co. produces hospital equipment. Most of its revenues are in the United States. About half of its expenses require outflows in Philippine pesos (to pay for materials obtained in the Philippines). Most of Longhorn’s competition is from U.S. firms

> Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice their products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if

> Consider a period in which the U.S. dollar weakens against the euro. How will this affect the reported earnings of a U.S.-based MNC with European subsidiaries? Consider a period in which the U.S. dollar strengthens against most foreign currencies. How wi

> Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure?

> Lexington Co. is a U.S.- based MNC with subsidiaries in most major countries. Each subsidiary is responsible for forecasting the future exchange rate of its local currency relative to the U.S. dollar. Comment on this policy. How might Lexington Co. ensur

> Syracuse Corp. believes that future real interest rate movements will affect exchange rates, and it has applied regression analysis to historical data to assess this relationship. It will use regression coefficients derived from this analysis along with

> You are hired as a consultant to assess a firm’s ability to forecast. The firm has developed a point forecast for two different currencies presented in the following table. The firm asks you to determine which currency was forecasted wi

> Explain how to assess performance in forecasting exchange rates. Explain how to detect a bias in forecasting exchange rates.

> Recall that Blades has tentatively decided to establish a subsidiary in Thailand to manufacture roller blades. The new plant will be utilized to produce Speedos, Blades’ primary product. Once the subsidiary has been established in Thailand, it will conti

> Explain the mixed technique for forecasting exchange rates.

> Explain the market-based approach to forecasting exchange rates. What is the rationale for using market-based forecasts? If the euro appreciates substantially against the dollar during a specific period, would market-based forecasts have overestimated or

> The prevailing one-year risk-free interest rate in Argentina is higher than the interest rate in the United States and will continue to be higher over time. Sycamore Co. believes the international Fisher effect can be used to derive the best forecast of

> Assume that interest rate parity exists. The one-year risk-free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in purchasing power parity, and you also believe that Singapore will experience a 2 percent inflat

> Assume that interest rate parity exists and it will continue to exist in the future. Kentucky Co. wants to forecast the value of the Japanese yen in one month. The Japanese interest rate is lower than the U.S. interest rate. Kentucky Co. will use either

> Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40, whereas the spot rate of the Japanese yen was $0.01. At that time, the one-year interest rate of the euro and the Japanese yen was 3 percent, compared to 7 percen

> Explain the fundamental approach to forecasting exchange rates. What are some limitations of using a fundamental technique to forecast these rates?

> Assume that interest rate parity exists. Today the one-year U.S. interest rate is equal to 8 percent, whereas Mexico’s one-year interest rate is equal to 10 percent. Today the two-year annualized U.S. interest rate is equal to 11 percent, whereas the two

> Assume that interest rate parity exists, and that it will continue to exist in the future. Assume that interest rates of the United States and the United Kingdom vary substantially in many periods. You expect that interest rates at the beginning of each

> Purdue Co. (based in the United States) exports cable wire to Australian manufacturers. It invoices its product in U.S. dollars and will not change its price over the next year. There is intense competition between Purdue and the local cable wire produce

> The Sports Exports Company produces footballs in the United States and exports them to the United Kingdom. It also has an ongoing joint venture with a British firm that produces some sporting goods for a fee. The Sports Exports Company is considering the

> New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. interest rate is 4 percent, regardless of the debt matu

> For all parts of this question, assume that interest rate parity exists, that the prevailing one-year U.S. nominal interest rate is low, and that you expect U.S. inflation to be low this year. a. Assume that the country Dinland engages in much trade wit

> Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 percent. The spot rate of Bolivia’s currency (called th

> The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar. The values of Latin American currencies have generally declined substantially against the dollar over time.

> The treasurer of Glencoe, Inc., detected a forecast bias when using the 30-day forward rate of the euro to forecast future spot rates of the euro over various periods. He believes he can use this information to determine whether imports ordered every wee

> You must determine whether there is a forecast bias in the forward rate. You apply regression analysis to test the relationship between the actual spot rate and the forward rate forecast (F ): The regression results are as follows Based on these results

> Explain the technical approach to forecasting exchange rates. What are some limitations of using technical forecasting to predict these rates?

> Assume that the following regression model was applied to historical quarterly data: Assume that the regression coefficients were estimated as follows: Also assume that the inflation differential in the most recent period was 3 percent. The real intere

> Assume that the forward rate is an unbiased but not necessarily accurate forecast of the future exchange rate of the yen over the next several years. Based on this information, do you think Raven Co. should hedge its remittance of expected Japanese yen p

> Recently, Ben Holt, Blades’ chief financial officer, has assessed whether it would be more beneficial for Blades to establish a subsidiary in Thailand to manufacture roller blades or to acquire an existing manufacturer, Skates’n’Stuff, which has offered

> You believe that the Singapore dollar’s exchange rate movements are mostly attributable to purchasing power parity. Today the nominal annual interest rate in Singapore is 18 percent, compared to 3 percent in the United States. You expect that annual infl

> Assume that you obtain a quote for a one-year forward rate on the Mexican peso. Assume that Mexico’s one-year interest rate is 40 percent, whereas the U.S. one-year interest rate is 7 percent. Over the next year, the peso depreciates by 12 percent. Do yo

> Cooper, Inc., a U.S.- based MNC, periodically obtains euros to purchase German products. It assesses U.S. and German trade patterns and inflation rates to develop a fundamental forecast for the euro. How could Cooper potentially improve its method of fun

> Royce Co. is a U.S. firm with future receivables one year from now denominated in Canadian dollars and British pounds. Its pound receivables are known with certainty, but its estimated Canadian dollar receivables are subject to a 2 percent error in eithe

> When some countries in Eastern Europe initially allowed their currencies to fluctuate against the dollar, would the fundamental technique based on historical relationships have been useful for forecasting future exchange rates of these currencies? Explai

> The director of currency forecasting at Champaign-Urbana Corp. says, “The most critical task of forecasting exchange rates is not to derive a point estimate of a future exchange rate, but rather to assess how wrong our estimate might be.” What does this

> Assume that foreign exchange markets were found to be weak-form efficient. What does this suggest about utilizing technical analysis to speculate in euros? If MNCs believe that foreign exchange markets are semi strong-form efficient, why would they devel

> Assume that the four-year annualized interest rate in the United States is 9 percent and the four-year annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate of the Singapo

> Explain corporate motives for forecasting exchange rates.

> One assumption made in developing the IFE is that all investors in all countries have the same real interest rate. What does this mean?

> The Sports Exports Company has been successful in producing footballs in the United States and exporting them to the United Kingdom. Recently, Jim Logan, the owner of the Sports Exports Company, has considered restructuring his company by expanding throu

> During the Asian crisis, direct intervention did not prevent depreciation of currencies. Offer your explanation for why the interventions did not work.

> Compare and contrast interest rate parity (discussed in Chapter 7), PPP, and the IFE.

> Assume U.S. interest rates are generally higher than foreign interest rates. What does this suggest about the future strength or weakness of the dollar based on the IFE? Should U.S. investors invest in foreign securities if they believe in the IFE? Shoul

> Explain the international Fisher effect (IFE). What is the rationale for the existence of the IFE? What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills? Explain why the IFE may not hold.

> Explain why PPP does not hold.

> The United States has expected inflation of 2 percent, whereas Country A, Country B, and Country C have expected inflation of 7 percent. Country A engages in much international trade with the United States. The products that are traded between Country A

> 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.