CHAPTER 27 Managing International Risks

Answers to Select Problem Sets

1.

a. b. c. d. e. f. g.

94.7050 94.6780 Yen is at premium (dollar is at discount). Premium = .0066, or .66% From interest rate parity, ryen = .0084 or .84% 94.6161 yen = $1 Inflation in Japan over the 3 months is expected to be .09% less than in the United States.

3.

a. b.

Nominal Exchange Rate = R3, 083 = $1 Real value of rupiah fell by 63%

4.

5. 6. 7.

b. Zero It can borrow the present value of 1 million, sell the Euros in the spot market, and invest the proceeds in an 8-year dollar loan. a. b. c. a. b. c. d. Pinkertons return =.0745, or 7.45% Butterflys return = .028, or 2.8% Her return in yen = .0316, or 3.16%. The dollar is selling at a forward premium on the rand. Annual % premium = -7.18% The forecast is: $1 = 7.9263 rand $12,616.23

8.

10.

11.

We can utilize the interest rate parity theory:

rrand 0.0162 1.62%

If the three-month rand interest rate were substantially higher than 1.62%, then you could make an immediate arbitrage profit by buying rands, investing in a three-month rand deposit, and selling the proceeds forward.

17.

a.

Pesos invested = 500,000 pesos Dollars invested = 37,834.36

b.

Total return in pesos = 10% Total return in dollars = -9.14%

c.

There has been a return on the investment of 10% but a loss on the exchange rate.