FOREIGN EXCHANGE MARKET: RISK, APPRECIATION,/DEPRECIATION

Write or type your answers to the question in" rel="nofollow">in the space provided below; if you need more room, you can write on the back of this page. Or attach your answers to this page. FOREIGN EXCHANGE MARKET: RISK, APPRECIATION,/DEPRECIATION FORWARD CONTRACTS, RISK MANAGEMENT (7 questions in" rel="nofollow">in total). 1) One of the functions of the foreign exchange market is to convert currencies. Convert the currencies as in" rel="nofollow">indicated below (note how the rate is presented in" rel="nofollow">in order to determin" rel="nofollow">ine how to calculate the amount you would receive): (1 poin" rel="nofollow">int) CONVERT RATE AMOUNT 100,000 US$ 1 US$ = 108.14 yen (¥) yen (¥) 10,814,000 45,000 US$ 1 US$ = 13.5033 Mex. Peso Mex. Peso 607,648.5 1200 US$ 1 Euro(€) = 1.2624 US$ Euro (€) 1,514.88 250 Brit.Pound (£) 1 BritPound(£) = 1.5360 US$ US$ 162.76 150,000 Indian rupee INR 1 US$ = 60.9610 INR US$ 9,144,150 2500 Australian $ 1 US $ = 1.3542 Aus.$ US$ 3,385.5 2) Explain" rel="nofollow">in what appreciation of a currency means. Explain" rel="nofollow">in what depreciation of a currency means. (1 poin" rel="nofollow">int) 3) What is Foreign Exchange risk? (1 poin" rel="nofollow">int) 4) Analyze the followin" rel="nofollow">ing exchange rates and identify if the subject currencies in" rel="nofollow">indicated are appreciatin" rel="nofollow">ing or depreciatin" rel="nofollow">ing in" rel="nofollow">in value based on the “new” rates quoted. (2 poin" rel="nofollow">ints) OLD RATE NEW RATE SUBJECT APP/DEP? 1 US$ = 90.20 Swiss Franc 1 US$ = 95.38 Swiss Franc Swiss Franc 1 ThBaht = US$ .0282 1 ThBaht = US$ .0296 Thai baht 108¥ Jap. yen = 1 US$ 98¥ Jap. yen = 1 US$ Japanese yen 1 Russ. ruble= US$ .0281 1 Russ. Ruble = US$ .0238 US dollar 1 US$ = 6.8365 Swed.krona 1US$ = 7.2773 Swed. krona Swedish krona 1Euro(€) = US$ 1.3719 1Euro(€) = US$ 1.38957 Euro 1US$ = 1,014.95 So.Kor.won 1US$ = 1,053.11So.Kor.won US dollar 1 US$ = 1.0188 Can. $ 1 US$ = .9645 Can. $ Canadian dollar 1 US$ = 7.5610 Arg. Peso 1 US$ = 7.86029Arg. Peso Argentin" rel="nofollow">ine peso 13.0260 MXP = 1 US$ 13.0560 MXP = 1 US$ Mexican peso Page one of two 5) What are forward exchange contracts? What is their purpose? What does it mean when a currency is sellin" rel="nofollow">ing at “discount on forward”? What does it mean when a currency is sellin" rel="nofollow">ing at “premium on forward”? (2 poin" rel="nofollow">ints) 6) Analyze the spot and forward rates quoted below. Identify if the expectation is, based on the forward rates, that the subject currencies in" rel="nofollow">indicated are goin" rel="nofollow">ing to appreciate or depreciate in" rel="nofollow">in value and if they are sellin" rel="nofollow">ing at a discount or premium on the forward rate. (The subject currency is what you hold and must convert) (1.5 poin" rel="nofollow">ints) COUNTRY SPOT RATE FORWARD RATE SUBJECT APP/DEP DISC/PREM on FWD? GERMANY 1.2667 US$/ Euro 1.1116 US $/Euro EURO GREAT BRITAIN 1.6608 US $/£ 1.3930 US $/£ BRITISH POUND CANADA .87350 US $/ CAD .8898 US$/CAD CANADIAN DOLLAR JAPAN .00874 US $/ ¥ .00946 US $/ ¥ YEN 7) Read the Closin" rel="nofollow">ing Case: “Billabong” on pages 318-19 of the textbook (10th ) and answer the followin" rel="nofollow">ing questions about foreign exchange risk management. (2 poin" rel="nofollow">ints) a) Why does a fall in" rel="nofollow">in the value of the Australian dollar again" rel="nofollow">inst the U.S. dollar benefit Billabong? b) Could the rise in" rel="nofollow">in the value of the Australian dollar that occurred in" rel="nofollow">in 2009 have been predicted? c) What might Billabong had done in" rel="nofollow">in order to better protect itself again" rel="nofollow">inst the unanticipated rise in" rel="nofollow">in the value of the Australian dollar that occurred in" rel="nofollow">in 2009? d) The Australian dollar contin" rel="nofollow">inued to rise by another 20 percent again" rel="nofollow">inst the U.S. dollar in" rel="nofollow">in between 2010 and 2012. How would this have affected Billabong? Is there anythin" rel="nofollow">ing that Billabong might have done to limit its long-term economic exposure to changes in" rel="nofollow">in the value of the currency in" rel="nofollow">in its largest export market?