Extra Questions
Chapters 5-7
1. An SDR is composed of $.63, €.41, £.0903, and ¥18.4. Given the following exchange rates, what is the value of the SDR in terms of Yen?
Exchange rates: $1.55/€, £.5/$, and ¥105/$
2. Is arbitrage possible given the following rates? $1.50/€, $2/£, and £.75/€? How much could you make if you had a $1000?
3. What would you expect the $/£ exchange rate to be in 5 years if the current rate is $1.80/£ and the pound is expected to appreciate by 40% over this period?
4. Assume the following:
Current exchange rate $2.00/₤, 3month forward rate $2.05/₤, and you expect the spot rate in 3 months to be $1.99/₤?
How would you speculate in the forward market? How much would you make assuming you had $1000?
How would you speculate in the spot market? How much would you make assuming you started with $2000?
5. Would you exercise a put if the exchange rate on the day of expiration was $1.50/€, the premium was $.10/€ and the strike price was $1.45/€? What is the breakeven exchange rate?
Chapter 4
1. If expected inflation rates in the US and the Euro zone are 6% and 9% respectively, what would you expect the exchange rate to be in 5 years if the current rate is €.7/$?
2. Where should you invest your money if interest rates in Canada (US) are 4% (5%), the current spot rate is C$1.05/$ and the 90 day forward rate is C$1.045/$? How much could you make in covered interest arbitrage?
Chapter 8
- Given the following information:
Spot rate €.6/$, 6 month forward rate €.61/$, interest rates p.a. in the US (Germany) are 4% (6%) respectively, a call option with a strike price of €.59/$ with a 2% premium, a put option with a strike price €.605/$ with a premium of 2.5%
How could you hedge a €200 million receivable? What is the breakeven exchange rate between the option alternative you choose and the forward market hedge?
Chapter 9
- Calculate the cash flows for a firm in dollars given the following information:
Spot rate €.6/$
Sales/year 1 million units in the US for $20/unit and 2 million units to Europe for €10/unit
Costs/unit = $10/unit and €3/unit (each of the 3 million units has this cost structure)
Tax 40%
Depreciation $4 million/year
Chapter 10
- ABC company has the following balance sheet in millions of pounds on December 31, 2008:
Assets / Liabilities and Net Worth
Cash 50 / Accounts Payable 30
Accounts Receivable 20 / Long-term Debt 40
Inventories 30 / Capital Stock 40
Net Plant and Equipment 50 / Retained Earnings 40
Relevant exchange rates:
£.5/$ Inventory and Capital Stock were acquired/issued at this rate
£.55/$ Plant and Equipment and Long-term debt were acquired/obtained at this rate. This was also the exchange rte on December 31, 2007.
£.6/$ Exchange rate on January 1, 2008.
Give the balance sheet accounts in $ on January 1, 2008 assuming no change in the £ accounts between December 31, 2007 and January 1, 2008 using (1) the current rate method and (2) the temporal method.
What is the accounting gain or loss under both methods?
Assume the value of retained earnings under the current rate method was $40 million.
Chapter 22
The following table represents the amounts each subsidiary owes each for the year. Figure out the optimal payments each sub should pay each other.
Payers
A / B / C / DA / - / 10 / 6 / 7
B / 4 / - / 11 / 2
C / 3 / 5 / - / 8
D / 7 / 4 / 6 / -
For example, A should pay B 4 and B should pay A 10.