France over this period? Assume that the anticipated rate is constant for both Basic countries. What relationship are you relying on in answering? (continued)

9. Exchange Rate Risk Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 22.1. You have just placed an order for 30,000 motherboards at a cost to you of 172.50 Singapore dollars each. You will pay for the shipment when it arrives in 90 days. You can sell the motherboards for $150 each. Calculate your profit if the exchange rate goes up or down by 10 percent over the next 90 days. What is the break-even exchange rate? What percentage rise or fall does this represent in terms of the Singapore dollar versus the U.S. dollar?

10. Exchange Rates and Arbitrage Suppose the spot and six-month forward rates on the deutsche mark are DM 1.55 and DM 1.62, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in Germany is 8 percent.

a. Is there an arbitrage opportunity here? If so, how would you exploit it?

b. What must the six-month forward rate be to prevent arbitrage?

11. The International Fisher Effect You observe that the inflation rate in the United States is 3 percent per year and that T-bills currently yield 3.7 percent annually. What do you estimate the inflation rate to be in:

a. The Netherlands, if short-term Dutch government securities yield 5 percent per year?

b. Canada, if short-term Canadian government securities yield 7 percent per year?

c. France, if short-term French government securities yield 10 percent per year?

12. Spot versus Forward Rates Suppose the spot and three-month forward rates for the yen are ¥124 and ¥122, respectively.

a. Is the yen expected to get stronger or weaker?

b. What would you estimate is the difference between the inflation rates of the United States and Japan?

13. Expected Spot Rates Suppose the spot exchange rate for the Hungarian forint is HUF 280. Interest rates in the United States are 3.5 percent per year. They are triple that in Hungary. What do you predict the exchange rate will be in one year? In two years? In five years? What relationship are you using?

14. Capital Budgeting You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 27.0 million. The cash flows from the project would be SF 7.5 million per year for the next five years. The dollar required return is 13 percent per year, and the current exchange rate is SF 1.72. The going rate on Eurodollars is 8 percent per year. It is 7 percent per year on Euroswiss.

a. What do you project will happen to exchange rates over the next four years?

b. Based on your answer in (a), convert the projected franc flows into dollar flows and calculate the NPV.

c. What is the required return on franc flows? Based on your answer, calculate the NPV in francs and then convert to dollars.

15. Using the Exact International Fisher Effect From our discussion of the Challenge Fisher effect in Chapter 7, we know that the actual relationship between a nom- (Question 15) inal rate, R, a real rate, r, and an inflation rate, h, can be written as:

This is the domestic Fisher effect.


(Question 14)

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