Items and/or transactions are said to be exposed if the following two conditions are met: they are denominated in foreign currencies and they are translated at the current exchange rate. The three types of foreign currency exposure are; Translation‚ Transaction and economic exposures Translation exposure Translation exposure measures the effect of an exchange rate change on published financial statements of a firm. Translation exposure results when a multinational corporation (MNC)
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replicating. CR7 is located in the US therefore‚ the company has two options: 1) the company can deposit their money on US saving account with a 1‚75% interest rate for a duration of 7 months. 2) The other option for the firm is to buy Euros on the spot market for 0‚58% on European account (also for a duration of 7 months). After the period of 7 months it can exchange euros for dollars. This exchange is against the 7 month forward rate. The exchange is arbitrage-free therefore‚ both options one and
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in the U.S.‚ i$ ‚ (interest rate in aU.S¿ dollar denominated bond‚ or rate of return in a U.S. dollar denominated US stock etc)‚ interest rate in Japan (iY ; – the spot exchange rate‚ S; and – the future exchange rate for maturity date‚ forward rate‚ F . • If the investor did not lock in a future exchange rate now‚ the unknown future spot exchange rate would make the investment risky. The investor can eliminate the uncertainty over the future dollar value of the investment by covering the investment
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direct quotes given‚ we find: A part (a) (b) (c) B # of forex units required 10‚000 2‚000‚000 50‚000 forex CD yen francs C = A*B ($/FC) # of direct dollars quote required 0.8437 $8‚437.00 0.004684 $9‚368.00 0.5139 $25‚695.00 (We have used the spot quotes in all cases.) Note that‚ in all cases‚ there are fewer dollars than foreign currency units. This is because each unit of these foreign currencies costs us less than $1 (all of the direct quotes are less than 1). 19-2. Now we need to translate
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Option contracts on the other hand give AIFS much more flexibility. If they future spot rate is lower than the option strike price‚ AIFS can cancel their option and buy Euros at the lower rate. AIFS must still pay the option premium though‚ currently 5% of the USD amount hedged. Unfortunately for AIFS their profit margin is only around 5%‚ so hedging completely with options could wipe out any profit. We chose the 75%/25% forward/option mix because it provides us with the lowest cost assuming
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` Cover Type B TO BE RETURNED AT THE END OF THE EXAMINATION. THIS PAPER MUST NOT BE REMOVED FROM THE EXAM CENTRE. SURNAME:____________________________________ FIRST NAME:____________________________________ STUDENT NO:____________________________________ COURSE:____________________________________ 25556 The Financial System Special exam‚ spring semester‚ 2011 Time Allowed: 3 hours plus 10 minutes reading time. Exam day and date:
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nothing they have no control over whether the project earns a profit or suffers from a loss. Using this strategy Dozier is hoping that the British pound will regain value against the dollar. Their hope is that the British pound will remain close to the spot rate it was bid at so when they receive payment of the original bid they can maintain or maximize profit potential. By following this strategy Dozier is taking the risk that the project works at a loss. Performing a break-even analysis reveals the
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Boston College‚ 140 Commonwealth Avenue‚ Chestnut Hill‚ MA 02467-3806‚ USA d The Brattle Group‚ 44 Brattle Street‚ Cambridge‚ MA 02138‚ USA Received 23 June 2000; accepted 2 October 2001 Abstract A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary‚ time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However‚ empirical evidence on the stochastic properties
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exchange rates‚ which are quoted in European terms? i) 2 USD for one British pound; ii) 0.75 euro for one USD; iii) 7.8 HKD for one USD; iv) 100 yen for one USD A) only i) B) only ii) C) iii) and iv) D) ii)‚ iii) and iv) 5. The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ exchange rate is SF1.25/$. The AUD/SF cross exchange rate is thus: A) 0.7813 B) 2.0000 C) 1.2800 D) 0.3500 6. Which of the following statements about forward rate/forward contract is FALSE? A) the forward
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1 The three year zero rate is 7% per annum and the four year zero rate is 7.5% pa (both continuously compounded). What is the one year (continuously compounded) forward rate starting in three years’ time? (2 marks) With the formula with continuously compounded‚ = =0.09 =9% The one year forward rate starting in three years’ time is 9% 1. The zero rate curve is flat at 6% pa with semi-annual compounding. What is the value of a FRA where the holder receives interest at the rate of 8% per annum
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