International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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if we to use the monetary approach to exchange rate determination, what would be the predicted effect on the xchange rate of domestic currency if domestic real income increases
Suppose quotes for the dollar–euro exchange rate E$/€ are as follows: in New York $1.05 per euro, and in Tokyo $1.15 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo.
Suppose the following exchange rate quotations are available:
Citibank quotes U.S. dollars per Euro: $1.2223/€Barclays Bank quotes U.S. dollars per pound sterling: $1.8410/£
Dresdner Bank quotes Euros per pound sterling: €1.5100/£
You are a market trader with $1,000,000. Will you be able to make an arbitrage profit using these quotes? If yes, why? What will be the profit? Show your calculations.
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- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardGanado Europe (D). Using facts in the chapter for Ganado Europe, assume that the exchange rate on January 2, 2016, in Exhibit 11.6 appreciated from $1.2300/€ to $1.6300/€. Calculate Ganado Europe's translated balance sheet for January 2, 2016, with the new exchange rate using the temporal rate method as shown in the popup window, E- a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? ... a. What is the amount of translation gain or loss? Enter a positive number for a gain and negative for a loss. (Round to the nearest dollar.)arrow_forwardExchange Rates What is the difference between fixed and floating exchange rates? How – using which policies and instruments - does Central Bank regulate exchange rates? Turkish Lira has been depreciating rapidly in the past two years. How this depreciation affects Turkish economy? Discuss using theoryarrow_forward
- Ganado Europe (A). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2016, in Exhibit 11.5 dropped in value from $1.1400/€ to $0.8700/€. Recalculate Ganado Europe's translated balance sheet for January 2, 2016, with the new exchange rate using the current rate method as shown in the popup window,. What is the amount of translation gain or loss? a. What is the amount of translation gain or loss? Enter a positive number for a gain and negative for a loss. $ (Round to the nearest dollar.) Where should it appear in the financial statements? The translation gain (loss) for the year is added to the balance in the Cumulative Translation Adjustment (CTA) account.arrow_forwardThe next two questions are based on the following information Consider the following prices in the international money markets: Spot rate: USD1.275/GBP One-year Forward rate: USD1.364/GBP Interest Rate (UK): 2.39% Interest Rate (US): 11.66% Assuming no transaction costs, which of the following statements is true? An arbitrage can be obtained by borrowing in the currency that is expressing the other currency. An arbitrage can be obtained by investing in the currency that is expressing the other currency. An arbitrage can be obtained by borrowing in the currency that is being expressed by the other currency. O d. An arbitrage cannot be obtained by investing in the currency that is being expressed by the other currency. O e. None of the option in this question are correct. O a. O b. O c. What should the forward rate be for the International Fisher Effect to hold? GBP1.4875/USD GBP1.3904/USD USD1.3904/GBP d. USD1.4875/GBP O e. None of the options in this question. a. O b. Ocarrow_forwardGanado Europe (C). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2016, in Exhibit 11.5 appreciated from $1.2900/€ to $1.5800/€. Calculate Ganado Europe's translated balance sheet for January 2, 2016, with the new exchange rate using the current rate method as shown in the popup window, a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? Data table a. What is the amount of translation gain or loss? Enter a positive number for a gain and negative for a loss. (Round to the nearest dollar.) (Click on the following icon in order to copy its contents into a spreadsheet.) EXHIBIT 11.5 Ganado Europe's Translation Loss After Depreciation of the Euro: Current Rate Method Assets Cash In Euros (€) (US$/euro) December 31, 2015 Exchange Rate Translated Accounts (US$) January 2, 2016 Exchange Rate (US$/euro) Translated Accounts (US$) 1,500,000 1.2900 $1,935,000 1.5800 $2,370,000 Accounts receivable Inventory…arrow_forward
- Forward premiums/discounts with bids/asks. Referring to the following spot and forward bid-ask rates for the US$/€ exchange rate, answer the questions that follow: a. Is the euro at a premium or discount vis-à-vis the U.S. dollar?b. What is the annualized forward premium or discount for each maturity?arrow_forwardGanado Europe (A). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2016, in Exhibit 11.5 dropped in value from $1.2800/€ to $0.9700/€. Recalculate Ganado Europe's translated balance sheet for January 2, 2016, with the new exchange rate using the current rate method as shown in the popup window, a. What is the amount of translation gain or loss? b. Where should it appear in the financial statements? ... a. What is the amount of translation gain or loss? Enter a positive number for a gain and negative for a loss. (Round to the nearest dollar.)arrow_forwardSuppose that a French firm would like to have its stock available through an American Depository Receipt (ADR). If the firm’s stock is currently selling for €75 and that the exchange rate between the € and the $ is €1.0=$1.0592. What price should we expect for the ADR in US dollars? Suppose that over the next year the dollar reaches parity with the Euro, i.e., $1.00=€1.00 and that the price of the French firm’s stock rises to €100. What would expect the price of the ADR to be?arrow_forward
- a) Differentiate between the different types of foreign exchange exposure that multinational companies usually face when engaging in cross-border transactions. b) Assume that the one-year interest rate is 3% (per annum) in the UK and 2% (per annum) in the Euro area. Also, assume that the current spot exchange rate of one pound to the euro is €1.1500/£ and that the corresponding one-year forward rate is €1.1400/£. i) Provide calculations to show whether the Interest Rate Parity (IRP) theory holds. ii) A UK-based investor has £200,000 to invest for a year either in the Euro area or the UK. Using the above information, determine which investment will generate a higher return for them. iii) Discuss the extent to which your results in i) and ii) above provide support to the Covered Interest Rate Parity (CIRP) condition.arrow_forward. A trader in Switzerland just agreed to trade Swiss francs for British pounds based on today's exchange rate. The trade is expected to settle tomorrow. What term best describes this exchange? A. Arbitrage transaction B. Forward trade C. Spot trade D. Purchasing power parity E. Interest rate parityarrow_forwardRegarding to the recent movements in UK Pound/US Dollar spot exchangerate, critically discuss main causes of exchange rate volatility in the foreign exchangemarkets.arrow_forward
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