# Chapter 3 homework questions 4. exchange rate effects on borrowing

Chapter 3 Homework Questions

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4. Exchange Rate Effects on Borrowing Explain how the appreciation of the Japanese yen against the U.S. dollar would affect the return to a U. S. firm tha borrowed Japanese yen and used the proceeds for a U.S. project.

15. Evolution of Floating Rates Briefly describe the historical developments that led to floating exchange rates as of 1973.

18. Foreign Exchange You just came back from Canada, where the Canadian dollar was worth \$.70. You still have C\$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for \$.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for \$.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C\$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain

22. International Financial Markets Walmart has established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These outlets are massive and contain imports in addition to products purchased locally. As Walmart generates earnings beyond what it needs in Shanzen, it may remit those earnings back to the United States. Walmart is likely to build additional outlets in Shanzen or in other Chinese cities in the future. a. Explain how the Walmart outlets in China would use the spot market in foreign exchange. b. Explain how Walmart might use the international money markets when it is establishing other Walmart stores in Asia. c. Explain how Walmart could use the international bond market to finance the establishment of new outlets in foreign markets.

Chapter 4 Homework questions

4. Income Effects on Exchange Rates Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar

9. Interaction of Exchange Rates Assume that there are substantial capital flows among Canada, the United States, and Japan. If interest rates in Canada decline to a level below the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U.S. dollar? How might this decline in Canada’s interest rates possibly affect the value of the Canadian dollar against the Japanese yen?

16. Economic Impact on Capital Flows How do you think the weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)?

22. Relative Importance of Factors Affecting Exchange Rate Risk Assume that the level of capital flows between the United States and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the United States and the country of Krendo and no capital flows. How will high inflation and high interest rates affect the value of the kren (Krendo’s currency)? Explain.

Chapter 5 Homework questions

5. Effects of a Forward Contract How can a forward contract backfire

7. Speculating with Currency Options When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars

15. Speculating with Currency Futures Assume that the euro’s spot rate has moved in cycles over time. How might you try to use futures contracts on euros to capitalize on this tendency? How could you determine whether such a strategy would have been profitable in previous periods?

17. Price Movements of Currency Futures Assume that on November 1, the spot rate of the British pound was \$1.58 and the price on a December futures contract was \$1.59. Assume that the pound depreciated during November so that by November 30 it was worth \$1.51. a. What do you think happened to the futures price over the month of November? Why? b. If you had known that this would occur, would you have purchased or sold a December futures contract in pounds on November 1? Explain.

25. Estimating Profits from Currency Futures and Options One year ago, you sold a put option on 100,000 euros with an expiration date of 1 year. You received a premium on the put option of \$.04 per unit. The exercise price was \$1.22. Assume that 1 year ago, the spot rate of the euro was \$1.20, the 1-year forward rate exhibited a discount of 2 percent, and the 1-year futures price was the same as the 1-year forward rate. From 1 year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). a. Determine the total dollar amount of your profit or loss from your position in the put option. b. Now assume that instead of taking a position in the put option 1 year ago, you sold a futures contract on 100,000 euros with a settlement date of 1 year. Determine the total dollar amount of your profit or loss.