(a) If Country A has higher inflation rate than Country B, the purchasing power parity implies that...
Question:
(a) "If Country A has higher inflation rate than Country B, the purchasing power parity implies that the currency of Country A will be weaken against the currency of Country B." Critically response in the context of currency risk.
(b) "A country is always worse off when its currency is weak (falls in value)." Do you agree? Justify.
(c) Johnson Plc is a UK company that has the following expected transactions:
One month: Expected payments of US$50,000
Three months: Expected receipts of US$120,000
The following information is gathered from ABC International Banks:
Spot rate (US$ per £): 1.4800 - 1.4840
One-month forward rate (US$ per £): 1.4799 - 1.4859
Three months' forward rate (US$ per £): 1.4806 - 1.4886
As a finance manager, you have to decide to use a forward contract to hedge against the currency risk for the two transactions mentioned above, calculate the expected sterling payments in one month, and receipts in three months, using the forward market.
(d) A bank is quoting the following exchange rates against the U.S dollar for the Singaporean dollar and the Australian dollar (assume that US dollar is the home currency):
S$/US$ = 0.8086-96
A$/US$ = 0.8635-45
An Australian firm asks the bank for a S$/A$ quote. Calculate the cross-rate the bank would quote.
(e) The spot dollar to pound exchange rate is $/£ = 1.4570-1.4576. The six-month forward dollar to pound exchange rate is $/£ = 1.4408-1.4434. Compute the annualized forward discount or premium on the pound relative to the dollar.
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary