1. Suppose the exchange rate between Japanese Yen and U.S. dollar is 120 ¥/$. Is this the direct quote or indirect quote from the U.S. perspective? State the reason.

2. Suppose the direct quote of the nominal exchange rate between U.S. dollar and Euro increases by 3% from the U.S. perspective. The inflation rate in the U.S. is 4% and the inflation rate in France is 5%.

a. What is the percentage change in the real exchange rate between US dollar and Euro based on the PPP theory? Please provide the formula, at least one step of calculation, and the correct value for full credit.

b. Is this a currency depreciation or appreciation in the U.S.? Why?

3. Suppose a U.S. company contracted to sell 10,000 units of a product to a French company at a unit sales price of €2 with delivery in 90 days and payment due on delivery. The nominal exchange rate between U.S. dollar and Euro is 1.4 $/€ on the contract signing date. The U.S. Company has the option of using a 90-day forward contract to protect itself against an adverse change in the exchange rate. Based on the assessment of the financial markets, the 90-day forward contract can be purchased at a discount of 4%.

a. If no forward contract is used and the nominal exchange rate between U.S. dollar and Euro increases to 1.45 $/€ on the delivery date, how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Provide at least one step of calculation for full credit.

b. If the U.S. Company chooses to use the 90-day forward contact to protect against the foreign exchange risk, how much will the U.S. Company receive in terms of U.S. dollar on the delivery date? Please provide the forward rate and at least one step of calculation for full credit.

Answer rating: 100% (QA)

1 It is indirect quote from US perspective since an indirect quote gives number of units of for... View the full answer