You are the manager of a U.S. company situated in Los Angeles and manages the import/export division of the company. The
Posted: Wed May 18, 2022 9:31 pm
You are the manager of a U.S. company situated in Los Angeles
and manages the import/export division of the company. The company
distributes (resells) a variety of consumer products imported to
the U.S.A from Australia and also exports goods manufactured in the
U.S.A. to Britain.
Therefore, your company is very much dependent on the impact of
current and future exchange rates on the performance of the
company.
Scenario 1:
You have to estimate the expected exchange rates between your
home currency and the other currencies of the major other countries
that you deal with in terms of both imports and exports. The reason
is that increases in the values of other currencies compared to the
U.S. Dollar may impact your imports negatively, whilst it may on
the other hand, be good for exports. To do this estimate, you
obtain the following spot exchange rate information:
£/$
0.76918
AUD$/$
1.38140
You also obtain the following annual risk free rates applying in
the countries:
U.S.A.
2.660%
Britain
0.778%
Australia
1.953%
Your focus is presently to estimate the 3 month
forward rates in order to consider the impact that it
will have on the import and export sales of the company. Calculate
the forward rates of the $ in terms of all the currencies by
using simple interest rate parity e.g.
10% annual interest rate = 10/2 = 5% for six
months. Do not apply effective annual interest rate
compounding. Show all your workings in Table
1 on the separate answer sheet by using the correct
formula provided in your formula sheet.
Table 1: Calculation of 3 month forward rates using the
simple interest rate parity principle (4 marks)
Exchange rate
Forward rate 3 months from now (provide answer with 5th
decimal rounding in this column)
Workings (Use of 6th decimal rounding in
workings)
£/$
AUD$/$
Provide an indication about what will happen to the value of the
US$ based on the forward exchange rate calculations by calculating
the expected discount/premium of it for each of the currencies
in Table 2 on the separate answer sheet.
Also show whether the impact will be positive (P) or negative (N)
for imports and exports. For example:
Exchange rate
% Discount/Premium
Import
Export
£/$
Workings by you …………….
= 1.93% premium
Positive
Negative
Table 2: Discounts/Premium of US$ (6 marks)
Exchange rate
% Discount/Premium (Show calculations with answer).
Answer must be rounded to 2 decimals. (1 mark each)
State whether positive or negative for
imports
(1 mark each)
State whether positive or negative for
exports
(1 mark each)
£/$
AUD$/$
and manages the import/export division of the company. The company
distributes (resells) a variety of consumer products imported to
the U.S.A from Australia and also exports goods manufactured in the
U.S.A. to Britain.
Therefore, your company is very much dependent on the impact of
current and future exchange rates on the performance of the
company.
Scenario 1:
You have to estimate the expected exchange rates between your
home currency and the other currencies of the major other countries
that you deal with in terms of both imports and exports. The reason
is that increases in the values of other currencies compared to the
U.S. Dollar may impact your imports negatively, whilst it may on
the other hand, be good for exports. To do this estimate, you
obtain the following spot exchange rate information:
£/$
0.76918
AUD$/$
1.38140
You also obtain the following annual risk free rates applying in
the countries:
U.S.A.
2.660%
Britain
0.778%
Australia
1.953%
Your focus is presently to estimate the 3 month
forward rates in order to consider the impact that it
will have on the import and export sales of the company. Calculate
the forward rates of the $ in terms of all the currencies by
using simple interest rate parity e.g.
10% annual interest rate = 10/2 = 5% for six
months. Do not apply effective annual interest rate
compounding. Show all your workings in Table
1 on the separate answer sheet by using the correct
formula provided in your formula sheet.
Table 1: Calculation of 3 month forward rates using the
simple interest rate parity principle (4 marks)
Exchange rate
Forward rate 3 months from now (provide answer with 5th
decimal rounding in this column)
Workings (Use of 6th decimal rounding in
workings)
£/$
AUD$/$
Provide an indication about what will happen to the value of the
US$ based on the forward exchange rate calculations by calculating
the expected discount/premium of it for each of the currencies
in Table 2 on the separate answer sheet.
Also show whether the impact will be positive (P) or negative (N)
for imports and exports. For example:
Exchange rate
% Discount/Premium
Import
Export
£/$
Workings by you …………….
= 1.93% premium
Positive
Negative
Table 2: Discounts/Premium of US$ (6 marks)
Exchange rate
% Discount/Premium (Show calculations with answer).
Answer must be rounded to 2 decimals. (1 mark each)
State whether positive or negative for
imports
(1 mark each)
State whether positive or negative for
exports
(1 mark each)
£/$
AUD$/$