Question 1

1. Explore how foreign exchange risk is introduced to the individual investor investing internationally.
2. A relatively small balance of trade deficit is commonly attributed to a strong demand for a country exports. What do you think is the underlying reason for the strong demand for a country exports?

Question 2

1. When South Koreas export growth stalled, some South Korean firms suggested that South Koreas primary export problem was the weakness in the Japanese yen. How would you interpret this statement?
2. In general terms, what is the attraction of foreign investments to domestic investors?

Question 3

1. McCanna Corp., a U.S. firm, has a French subsidiary that produces wine and exports to various European countries. All of the countries where it sells its wine use the euro as their currency, which is the same as the currency used in France. Is McCanna Corp. exposed to exchange rate risk? Explain.
2. Explain how the appreciation of the Brazilian Real against the U.S. dollar would affect the return to a U.S. firm that borrowed Real and used the proceeds for a U.S. project.

Question 4

1. Quebec Banks bid price for Canadian dollars (C$) is $.7938 and its ask price is $.81. What is the bid/ask percentage spread for both Canadian $ and US $? Why are they the same? What happen if they are not the same?
2. Explain why the value of the euro against the dollar will not always move in tandem with the value of the Japanese Yen against the dollar.

Question 5

1. How can currency futures be used by speculators? Illustrate with an example
2. Assume the following information:

Spot rate of Canadian dollar $.80

90 day forward rate of Canadian dollar $.79

90 day Canadian interest rate 3.5%

90 day U.S. interest rate 2.5%

Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? What would the return to a Canadian investor who used covered interest arbitrage? What market forces would occur to eliminate any further possibilities of covered interest arbitrage?