please lable and answer all questions.

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please lable and answer all questions.

Please Lable And Answer All Questions 1 (84.96 KiB) Viewed 51 times

3. Trading in foreign exchange What are spot rates and forward rates? Suppose you open the newspaper today and observe the following indirect exchange rate quotations for the British pound: Forward Exchange Rates 30 Days 60 Days 90 Days Spot Exchange Rates 0.5298 British pound (pound/dollar) 0.5311 0.5335 0.5378 The British pound is selling at a discount in the forward market. Suppose you make a £500,000 sale to a British customer who has 60 days to pay you in cash. The customer will pay you in British pounds, but your company is based in the United States, so you are most concerned with the dollar value of the payment. If the customer pays you £500,000 today, how much is that worth in dollars? O $1,038,127 O $660,626 O $896,564 0 $943,752 Assume that the forward market is correct and the 60-day forward exchange rate quoted in the newspaper today (above) is the spot exchange rate 60 days from now. If the customer waits the full 60 days and pays you £500,000, how much have you lost in dollar terms) due to exchange rate fluctuations? O $6,872 O $7,527 O $4,909 O $6,545

4. Interest rate parity The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: An American investor is considering investing $1,000 in default-free 90-day Japanese bonds that promise a 5% annual nominal return. • The spot exchange rate is ¥104.79 per dollar. • The 90-day forward exchange rate is ¥103.55 per dollar. The investor's annualized return on these bonds—if he or she can lock in the dollar return by selling the foreign currency in the forward market-will be Which of the following statements is implied by interest rate parity theory? O A product bought in one country should have the same price in other countries, adjusted for exchange rate. O An investment in one's home country should have the same return as a similar investment in a foreign country. O Interest rates in all countries should be the same. O Interest rates in all countries with the same political risk should be the same.