HighTech is a multinational U.S.A. company that performs diverse activities. It manufactures electronic tools like hand-held digital electronic veniers, digital multimeters, voltage testers etc.

To conduct this manufacturing they import certain electronic components from countries like Japan and South Korea.

The market for the manufactured tools are the U.S.A, Australia, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K. Therefore, the company has already put up a subsidiary in the U.K. It resells and distribute the products to different businesses. The quarterly net profit after tax generated by the subsidiary is £500,000. The exports to Canada and Australia are to other independent distributing companies that buys the tools at wholesale prices from HighTech.

HighTech is also considering the construction of an electronic component manufacturing plant in the U.S.A. to eliminate the risks and costs associated with the current importing of electronic components from countries like Japan and South Korea.

HighTech already has sufficient manufacturing space available and only has to import manufacturing equipment of 63,000,000 Yen from Japan. The installation of the machinery will be conducted by local U.S.A. companies and will cost $1000,000.

The Chief Executive Officer (CEO) of HighTech, requests the following information to assist him with determining the extent of exchange rate risk and the availability of funds to conduct the multinational transactions:

1. The CEO requires a forecast of the one year and two year exchange rates for the $/£ calculated based on purchasing power parity (PPP) and with the International Fisher Effect (IFE) with the following existing available information:

Current $/£ spot exchange rate	$1.3036/£
Expected annual U.S. inflation	0.37%
Expected annual British inflation	0.20%
Expected U.S. one-year interest rate	0.140%
Expected British one-year interest rate	0.077%

The CEO requires a forecast of the one year and two year exchange rates for the $/£ calculated based on purchasing power parity (PPP) and with the International Fisher Effect (IFE).

Calculate the one year forward $/£ exchange rate based on PPP in the space provided below: (2 marks)

Calculate the two year forward $/£ exchange rate based on PPP in the space provided below: (2 marks)

Calculate the one year forward $/£ exchange rate based on IFE in the space provided below: (2 marks)

Calculate the two year forward $/£ exchange rate based on IFE in the space provided below: (2 marks)

Answer rating: 100% (QA)

HighTech Exchange Rate Forecasts Assumptions We are currently in February 2024 based on the current ... View the full answer