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##### 1. The euro is currently trading at a rate of EUR/...

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1. The euro is currently trading at a rate of EUR/USD = 1.32. Economists in your firm estimate the rate of inflation in the U.S. should be about 2% annually and 3% annually in the Euro Zone. Given the information concerning the currency spot rate and inflation forecasts, forecast the spot rate for the euro in 2 years. (2 points) 2. You are a financial analyst for Martin Containers which manufactures and sells corrugated boxes for commercial, farm and industrial uses to customers worldwide. You have been assigned the task of negotiating forward contracts with the firm?s bankers involving the U.S. dollar and Swiss franc. The firm?s business economists have forecasted interest rates in the U.S. to be 3% annually for the next five years and interest rates in Switzerland to be 1% over the same time period. The current spot rate for the franc is CHF/USD = 1.0550. For the purposes of negotiations with the bankers, forecast the 3-year forward rate for the franc. (2 points) 3. The forecasted rate of interest in the UK is 3% and 1% in the U.S. The current spot rate for the pound is GBP/USD = 1.5035. Forecast the spot rate in 1 year. (2 points) 4. You have the following information about exchange rates available to the management of Riverside Corporation, which will receive 400,000 British pounds (GBP) in 180 days from a UK customer: 180-day forward rate of GBP \$1.40 Spot rate of GBP \$1.43 Riverside Corporation can borrow in the UK at an annual interest rate of 5% and the firm can invest in the U.S. at an interest rate of 3%. Management is considering hedging the receivables position. Describe how the firm would use a forward hedge and a money market hedge on the pound receivables. Which hedging method would be better and why? Substantiate your answer with the estimated cash flows for each type of hedge. (6 points)

Paper#10110 | Written in 18-Jul-2015

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