Purchasing Power Parity (PPP): Law of 1 Price Identical goods in two different markets with no restrictions on sale or transportation costs of moving the product btw the two markets that the product prices should be the same Conversion to the foreign currency P$ X S = P(Euros) S = spot exchange rate Spot rate = P(Euros)/P$ Not workable because we are talking about specific products. Not every pair of prices will equal the spot rate Readjust the PPP Absolute form of PPP Extension of the law
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Assuming that IRP exists‚ if the spot rate of the Singapore dollar is $.55 and the three-month forward rate is $.58‚ then: a. the U.S. interest rate must be higher than Singapore’s interest rate. b. the U.S. interest rate must be lower than Singapore’s interest rate. c. the U.S. interest rate must equal Singapore’s interest rate. d. covered interest arbitrage is feasible. correct: a 6 Which of the following institutions makes sure that forward rates are priced according to IRP at a given point
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10 a. PPP .. 10 b. FE .. ..12 c. IFE .. .14 4. Conclusion & Recommendations . .. 16 Bibliography .17 Appendix A. Historical Data 18 Table of Figures Figure 1. International Parity Conditions Figure 2. Scatter Diagram for PPP Figure 3. Time-series data for inflation rates differential and exchange rate change Figure 4. Regression Plot for PPP Figure 5. Scatter
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Chapter 1 Answers to End of Chapter Questions 1. Agency Problems of MNCs. a. Explain the agency problem of MNCs. ANSWER: The agency problem reflects a conflict of interests between decision-making managers and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the best interest of the owners. b. Why might agency costs be larger for an MNC than for a purely domestic firm? ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the following
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Forecasting (b) Fundamental Forecasting (c) Market-Based Forecasting (d) Mixed Forecasting 8. Exchange Rate Theories 8.1 Interest Rate Parity (IRP) 8.2 Purchasing Power Parity (PPP) 8.3 International Fisher Effect (IFE) © The Institute of Chartered Accountants of India 12.2 Strategic Financial Management 8.4 Comparison of PPP‚ IRP and IFE Theories 9. Risk Management 10. Risk Considerations 10.1 Financial Risk 10.2 Business Risk 10.3 Credit or Default Risk 10.4 Country
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MXN15.99/EUR exchange rate. The NPV in Euros is €92‚464. [1] See Exhibit 1. · Method B: NPV in Euros. Assume that PPP and Fisher Equation holds‚ then we can get the future spot rate of exchange for each year and conclude the NPV in Euros at €92‚464[2] · Conclusion: The NPV of this equipment investment would be same whether we use Method A or Method B as long as IRP and PPP hold. Arnaud Martin should therefore not have any preference between the two methods. Both computed NPVs are positive
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Solution to ch 7 Answers to End of Chapter Questions 1. Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. ANSWER: Locational arbitrage can occur when the spot rate of a given currency varies among locations. Specifically‚ the ask rate at one location must be lower than the bid rate at another location. The disparity in rates can occur since information is not always immediately available to all banks. If a disparity does exist‚ locational
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For FX Determination.............................................................9 2.1.1 Purchasing Power Parity (PPP)....................................................................9 2.1.2 Interest Rate Parity (1RP)..........................................................................11 2.1.3 International Fisher Effect (IFE)................................................................11 2. Types of Foreign Exchange (FX) Exposures.......
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1. Issue one: Foreign exchange risk and economic implication In the context of international trade and integration‚ multinational companies have a lot of opportunities to expand and make profits but they are also likely to face new challenges. One of the most risks such firms need to be recognized is foreign exchange exposure which is directly related to foreign exchange rate. 1.1. Possible foreign exchange risk In order to have a comprehensive view regarding foreign exchange risk‚ this part will
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Assignment# 3 by Nedim Halilagic Chapter 6 14. Freely Floating Exchange Rates. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages? ANS: Given that Asian countries are rising economies and that floating exchange rate systems allows currency values to reflect a nation’s economic fundamentals gradually and efficiently‚ I would say that they should allow their
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