Name:_______________________ DATE:
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Write or type your answers to the question in the space provided below; if you need more room, you can write on the back of this page. Or attach your answers to this page.
Due date: Monday, May 8, 2017.
FOREIGN EXCHANGE MARKET: RISK, APPRECIATION,/DEPRECIATION
FORWARD CONTRACTS, RISK MANAGEMENT (7 questions in total).
- One of the functions of the foreign exchange market is to convert currencies. Convert the currencies as indicated below (note how the rate is presented in order to determine how to calculate the amount you would receive): (1 point)
CONVERT | RATE | AMOUNT |
100,000 US$ | 1 US$ = 112.02 yen (¥) | yen (¥) |
45,000 US$ | 1 US$ = 19.8949 Mex. Peso | Mex. Peso |
1200 US$ | 1 Euro(€) = 1.0554 US$ | Euro (€) |
250 Brit.Pound (£) | 1 BritPound(£) = 1.2460 US$ | US$ |
150,000 Indian rupee INR | 1 US$ = 66.9610 INR | US$ |
2500 Australian $ | 1 US $ = 1.3027 Aus.$ | US$ |
- Explain what appreciation of a currency means. Explain what depreciation of a currency means. (1 point)
- What is Foreign Exchange risk? (1 point)
- Analyze the following exchange rates and identify if the subject currencies indicated are appreciating or depreciating in value based on the “new” rates quoted. (1.5 points)
OLD RATE NEW RATE SUBJECT APP/DEP?
1 US$ = 92.23 Swiss Franc | 1 US$ = 95.38 Swiss Franc | Swiss Franc | |
1 ThBaht = US$ .02896 | 1 ThBaht = US$ .02874 | Thai baht | |
112¥ Jap. yen = 1 US$ | 108¥ Jap. yen = 1 US$ | Japanese yen | |
1 Russ. ruble= US$ .0281 | 1 Russ. Ruble = US$ .0238 | US dollar | |
1 US$ = 8.992.83 Swed.krona | 1US$ = 7.9773 Swed. krona | Swedish krona | |
1Euro(€) = US$ 1.1719 | 1Euro(€) = US$ 1.16957 | Euro | |
1US$ = 1,094.95 So.Kor.won | 1US$ = 1,129.11So.Kor.won | US dollar | |
1 US$ = 1.1188 Can. $ | 1 US$ = 1.2964 Can. $ | Canadian dollar | |
1 US$ = 20.0130 Arg. Peso | 1 US$ = 15. 4888 Arg. Peso | Argentine peso | |
13.0260 MXP = 1 US$ | 19.8560 MXP = 1 US$ | Mexican peso |
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- What are forward exchange contracts? What is their purpose? What does it mean when a currency is selling at “discount on forward”? What does it mean when a currency is selling at “premium on forward”? (2 points)
- Analyze the spot and forward rates quoted below. Identify if the expectation is, based on the forward rates, that the subject currencies indicated are going to appreciate or depreciate in value and if they are selling at a discount or premium on the forward rate. (The subject currency is what you hold and must convert) (1.5 points)
COUNTRY | SPOT RATE | FORWARD RATE | SUBJECT | APP/DEP | DISC/PREM on FWD? |
GERMANY | 1.0667 US$/ Euro | 1.1116 US $/Euro | EURO | ||
GREAT BRITAIN | 1.2930 US $/£ | 1.2462 US $/£ | BRITISH POUND | ||
CANADA | .7898 US $/ CAD | .7746 US$/CAD | CANADIAN DOLLAR | ||
JAPAN | .00874 US $/ ¥ | .00946 US $/ ¥ | YEN |
7) Part 4 Case: “Caterpillar: Competing in a World of Fluctuating Currencies” on pages 376-77 of the textbook (10th edition) and answer the following questions about foreign exchange risk management. (2 points)
- a) In the 1980’s a stronger dollar hurt Caterpillar’s competitive position, but in 2008 a stronger dollar did not seem to have the same effect. What had changed?
- b) How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign exchange risk? What is the downside of its approach?
- c) Explain the difference between transaction exposure and translation exposure using the material in the Caterpillar cases to illustrate your answer.
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