Goodyear, a U.S. firm, sells tires to Airbus UK, and will receive payment of 1,000,000 in...

 

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Goodyear, a U.S. firm, sells tires to Airbus UK, and will receive payment of £1,000,000 in one year. Goodyear's bank quotes the information below: o The spot exchange rate is es/£$1.50/€ o The 1-year interest rate on dollars is lus -2.00% o The 1-year interest rate on pounds is luk - 5.50% o The 1-year forward rate on pounds is fs/£-$1.45/E In addition, Goodyear contacts private forecasters in the market and concludes: The 1-year-ahead expected exchange rate on the Pound is exs/E = $1.40/E A. Does covered interest rate parity hold for the information given? If so, explain why. If not, explain what the forward rate would be when covered interest parity holds and other variables remain unchanged. B. Does uncovered interest rate parity hold for the information given? If so, explain why. If not, explain what the expected future spot rate would be when uncovered interest parity holds. C. Given the forward rate available in the market and the expected exchange rate by Goodyear's forecasters, are the forecasters displaying more or less optimism about the Pound? Given this, if Goodyear hedges their exposure to the Pound cash flow, how would they do this and how many dollars do they "know" they will get in one year? Without hedging, how many dollars do they expect to get? D. Let's say the Goodyear forecasts leak to the public, and the forecasters have a high reputation from investors. For this reason, the market as a whole moves their expectation for the future exchange rate towards $1.40/£. Explain the asset repositioning we see between US and UK assets, and how this moves today's spot rate (what is the new exchange rate now)? Goodyear, a U.S. firm, sells tires to Airbus UK, and will receive payment of £1,000,000 in one year. Goodyear's bank quotes the information below: o The spot exchange rate is es/£$1.50/€ o The 1-year interest rate on dollars is lus -2.00% o The 1-year interest rate on pounds is luk - 5.50% o The 1-year forward rate on pounds is fs/£-$1.45/E In addition, Goodyear contacts private forecasters in the market and concludes: The 1-year-ahead expected exchange rate on the Pound is exs/E = $1.40/E A. Does covered interest rate parity hold for the information given? If so, explain why. If not, explain what the forward rate would be when covered interest parity holds and other variables remain unchanged. B. Does uncovered interest rate parity hold for the information given? If so, explain why. If not, explain what the expected future spot rate would be when uncovered interest parity holds. C. Given the forward rate available in the market and the expected exchange rate by Goodyear's forecasters, are the forecasters displaying more or less optimism about the Pound? Given this, if Goodyear hedges their exposure to the Pound cash flow, how would they do this and how many dollars do they "know" they will get in one year? Without hedging, how many dollars do they expect to get? D. Let's say the Goodyear forecasts leak to the public, and the forecasters have a high reputation from investors. For this reason, the market as a whole moves their expectation for the future exchange rate towards $1.40/£. Explain the asset repositioning we see between US and UK assets, and how this moves today's spot rate (what is the new exchange rate now)?

Answer rating: 100% (QA)

A Covered interest rate parity CIRP states that the forward exchange rate should equal the expected future spot exchange rate adjusted for interest ra... View the full answer