1.Given the following Euro to $ Exchange rate of 1.46, what is the information c

Question

1.Given the following Euro to $ Exchange rate of 1.46, what is the information contained in this quote? If the Purchasing Power Parity Theory is correct, what is true about the relationship between the US dollar and the Euro at this exchange rate?

2. Identify and describe the ways in which a US company can participate in international commerce.

3.The price of a currency forward contract is determined by the relationship between interest rates of the two countries in question and the time period covered by the contract. Is this statement exactly true, partly true or false. Explain your response.

4. Company ABC commits to sell $10 million of its product (produced in the US with raw materials from the US) to a Japanese customer delivered within 60 days from today with payment to be received 90 days from today in yen. What are the risks faced by ABC? What are the events in the currency markets which would erode the profitability of this sale? How can ABC protect itself from the adverse consequences of currency market fluctuations?

5. Citibank US plans to lend $100 million US to a Canadian customer. The borrower will repay the loan in Canadian dollars. Describe in some detail how the risks of this loan differ from those of lending $10 million in the US. What are the ways that a US bank can manage the risks of lending in Canada.

Explanation / Answer

Solution :

1) If the Purchasing Power Parity Theory is correct then the relationship between the US dollar and Euro at this exchange rate can be explained using purchasing power parity theory as follows:

A given amount of one dollar thus has the same purchasing power whether used directly to purchase a market basket of goods or used to convert at the PPP rate to EURO and then purchase the market basket using EURO currency.

2) For a company in the United States wishing to expand beyond national borders, there are a variety of ways to get involved in international business.

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