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. FOREIGN EXCHANGE MARKET: RISK, APPRECIATION,/DEPRECIATION FORWARD CONTRACTS, RISK MANAGEMENT (7 questions in total). 1) 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$ = 108.14 yen (¥) yen (¥) 10,814,000 45,000 US$ 1 US$ = 13.5033 Mex. Peso Mex. Peso 607,648.5 1200 US$ 1 Euro(€) = 1.2624 US$ Euro (€) 1,514.88 250 Brit.Pound (£) 1 BritPound(£) = 1.5360 US$ US$ 162.76 150,000 Indian rupee INR 1 US$ = 60.9610 INR US$ 9,144,150 2500 Australian $ 1 US $ = 1.3542 Aus.$ US$ 3,385.5 2) Explain what appreciation of a currency means. Explain what depreciation of a currency means. (1 point) 3) What is Foreign Exchange risk? (1 point) 4) Analyze the following exchange rates and identify if the subject currencies indicated are appreciating or depreciating in value based on the “new” rates quoted. (2 points) OLD RATE NEW RATE SUBJECT APP/DEP? 1 US$ = 90.20 Swiss Franc 1 US$ = 95.38 Swiss Franc Swiss Franc 1 ThBaht = US$ .0282 1 ThBaht = US$ .0296 Thai baht 108¥ Jap. yen = 1 US$ 98¥ Jap. yen = 1 US$ Japanese yen 1 Russ. ruble= US$ .0281 1 Russ. Ruble = US$ .0238 US dollar 1 US$ = 6.8365 Swed.krona 1US$ = 7.2773 Swed. krona Swedish krona 1Euro(€) = US$ 1.3719 1Euro(€) = US$ 1.38957 Euro 1US$ = 1,014.95 So.Kor.won 1US$ = 1,053.11So.Kor.won US dollar 1 US$ = 1.0188 Can. $ 1 US$ = .9645 Can. $ Canadian dollar 1 US$ = 7.5610 Arg. Peso 1 US$ = 7.86029Arg. Peso Argentine peso 13.0260 MXP = 1 US$ 13.0560 MXP = 1 US$ Mexican peso Page one of two 5) 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) 6) 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 1.2667 US$/ Euro 1.1116 US $/Euro EURO GREAT BRITAIN 1.6608 US $/£ 1.3930 US $/£ BRITISH POUND CANADA .87350 US $/ CAD .8898 US$/CAD CANADIAN DOLLAR JAPAN .00874 US $/ ¥ .00946 US $/ ¥ YEN 7) Read the Closing Case: “Billabong” on pages 318-19 of the textbook (10th ) and answer the following questions about foreign exchange risk management. (2 points) a) Why does a fall in the value of the Australian dollar against the U.S. dollar benefit Billabong? b) Could the rise in the value of the Australian dollar that occurred in 2009 have been predicted? c) What might Billabong had done in order to better protect itself against the unanticipated rise in the value of the Australian dollar that occurred in 2009? d) The Australian dollar continued to rise by another 20 percent against the U.S. dollar in between 2010 and 2012. How would this have affected Billabong? Is there anything that Billabong might have done to limit its long-term economic exposure to changes in the value of the currency in its largest export market?
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