# Management

Name:_______________________     DATE:

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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)

1. 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?
2. 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?
3. 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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