1. Ubiflex Technology Ubiflex Technology expects to receive 25,000,000 Japanese
ID: 2819024 • Letter: 1
Question
1. Ubiflex Technology
Ubiflex Technology expects to receive 25,000,000 Japanese yen 90 days from now. Ubiflex decides to
hedge its position by selling Japanese yen forward. The current spot rate of the yen is $.0079, while the
forward rate is $.0085. Ubiflex expects the spot rate in 90 days to be $.0080. How many dollars will
Ubiflex receive for the 25,000,000 yen 90 days from now? Show all steps clearly.
2. Suppose that a Richard Mille RM27-03 watch costs €777,000 in Germany and that the current
EUR/USD exchange rate is $1.20. One Canadian dollar is worth $0.82 USDs. Calculate the Canadian
dollar price of a Richard Mille RM27-03 watch. Show all steps clearly.
3. A U.S. investor buys 500 shares of CEMEX (CEMEXCPO.MX ) on the Bolsa Mexicana de Valores
(Mexican Stock Exchange) for 6.8 MXN per share in 2009. The price of CEMEX increases to 13 MXN
per share in 2010 when this U.S. investor sells. The USD was worth 12.05 MXN when the investor
bought CEMEX in 2009. The USD appreciated to 13.7 MXN when the investor sold CEMEX in 2010.
What is the U.S. dollar return of this investment to the investor? Show all steps clearly.
4. Who is Shinzo Abe? What is the inflation goal of Abenomics? What effect will Abenomics have on
the value of the Yen against the USD according to theory? Explain using a diagram.
Compare and contrast the theoretical effects of Abenomics on the value of the Yen with the real-world
experience of Abenomics on the value of the Yen against the U.S. dollar after Abe’s election in
December 2012.
5. Wisconsin Whiskey and Wurst (3W)
a. 3W is a Wisconsin firm that recently established a European subsidiary with a major Wurst
production facility in Munich. The subsidiary was designed to make the wonderful 3W Wurst in
Germany to export to America. 3W will sell this Wurst throughout Wisconsin. The subsidiary pays its
local employees in Euros. The subsidiary has all of its expenses denominated in Euros. If the Euro
strengthens over the next four years, will the value of 3W be favorably affected, unfavorably affect, or
not affected? Briefly explain.
b. If 3W finances its Munich production facility by borrowing in Euros from BNP Bank how will its
exchange rate exposure change? Why?
Practice Problems 1
Dr. John Spry
International Financial Management
6. Wu Tang Financial
You go to Wu Tang Financial and are given these foreign exchange quotes
You can buy a euro for 18 pesos.
The bank will pay you 17.5 pesos for a euro.
You can buy a U.S. dollar for 0.9 euros.
The bank will pay you 0.85 Euros for a U.S. dollar.
You can buy a U.S. dollar for 17 Mexican pesos.
The bank will pay you 16.5 Mexican pesos for a U.S. dollar.
You have $1,000,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of
the transactions that you would execute, and the profit that you would earn. If you cannot earn a profit
from triangular arbitrage, explain why.
You have $1,000,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of
the transactions that you would execute, and the profit that you would earn. If you cannot earn a profit
from triangular arbitrage, explain why.
7. Short Answer
a. What is definition of the current account?
b. What is definition of the capital and financial account?
c. What is the approximate position of the U.S. trade balance on services?
d. What is the approximate position of the U.S. trade balance on goods and services?
e. What is the approximate position of the U.S. capital and financial account?
f. What was the Gold Standard? How did it affect exchange rates?
g. What was Bretton Woods Agreement? When was Bretton Woods Agreement in effect? How did it
affect exchange rates?
8.Suppose that a BMW costs E 45,000 in Germany and that the current USD/EUR exchange rate is
.7624.
Calculate the dollar price of the BMW
Explanation / Answer
Answer 7 A. Current Account
The current account records a nation's transactions with the rest of the world – specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments – over a defined period of time, such as a year or a quarter.
In economics, a country's current account is one of the two components of its balance of payments, the other being the capital account (also known as the financial account). The current account consists of the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net cash transfers, that have taken place over a given period of time. The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow). A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
Answer 7 B. Capital and Financial Account
A financial account is a component of a country’s balance of payments that covers claims on or liabilities to nonresidents, specifically with regard to financial assets. Financial account components include direct investment, portfolio investment and reserve assets broken down by sector. When recorded in a country’s balance of payments, nonresidents' claims made on residents' financial assets are liabilities, while claims made against nonresidents by residents are assets.
Answer 7 C.
Approximate position of the U.S. trade balance on servicesincreased in July 2018 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $45.7 billion in June (revised) to $50.1 billion in July, as exports decreased and imports increased. The previously published June deficit was $46.3 billion. The goods deficit increased $4.2 billion in July to $73.1 billion. The services surplus decreased $0.1 billion in July to $23.1 billion.
Answe 7 D.
The balance of trade is the difference between the value of a country's imports and exports for a given period. The balance of trade is the largest component of a country's balance of payments. Economists use the BOT to measure the relative strength of a country's economy. The balance of trade is also referred to as the trade balance or the international trade balance.
Answe 7 E.
The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP) as of Q1 2014.
The U.S. increased the ratio of public and private debt from 152% GDP in 1980 to peak at 296% GDP in 2008, before falling to 279% GDP by Q2 2011. The 2009-2011 decline was due to foreclosures and increased rates of household saving. There were significant declines in debt to GDP in each sector except the government, which ran large deficits to offset deleveraging or debt reduction in other sectors.
Answe 7 F.
The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
The Gold Standard
The origins of the Gold Standard in international commerce begin in 19th century Britain after the English Monarchy adopted the Gold Standard in 1816 with the passage of the Coinage Act.
The Coinage Act was the first instance of defining the value of the British Pound Sterling in relation to gold. The value of one pound of 22-Karat gold at the time was set to be equivalent to £46 14 s 6 d or 46 Pounds, 14 Shillings and 6 Pence.
Silver was also used as a standard means of exchange. Nevertheless, the price of silver was pegged in relation to gold, and at the time of the Coinage Act, it was set to a ratio of 15 ½ units of silver to one unit of gold.
Before the advent of the Gold Standard in, most countries would use physical gold or silver for the payment of goods and debts. Nevertheless, by linking their currencies to the value of gold as a standard, nations found they could use printed paper currency backed by gold in reserve for the payment of debts.
Answe 7 G.
The 1944 Bretton Woods agreement established a new global monetary system. It replaced the gold standard with the U.S. dollar as the global currency. By so doing, it established America as the dominant power in the world economy. After the agreement was signed, America was the only country with the ability to print dollars.
The agreement created the World Bank and the International Monetary Fund. These U.S.-backed organizations would monitor the new system.
The Bretton Woods Agreement
The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire.
Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. How exactly would they do this? If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets. That would lower the currency's supply and raise its price. If its currency became too high, the bank would print more. That would increase the supply and lower its price.
Members of the Bretton Woods system agreed to avoid trade wars. For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war.
How It Replaced the Gold Standard
Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to redeem its currency for U.S. dollars, not gold. Why dollars? The United States held three-fourths of the world's supply of gold. No other currency had enough gold to back it as a replacement. The dollar's value was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transition from a gold standard to a U.S. dollar standard.
The dollar had now become a substitute for gold. As a result, the value of the dollar began to increase relative to other currencies. There was more demand for it, even though its worth in gold remained the same. This discrepancy in value planted the seed for the collapse of the Bretton Woods system three decades later.
Answer 8.
BME cost E 45,000
Current USD exchange rate is 0.7624
BMW price = 45,000*0.7624 = 34,348
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.