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1. James Smith is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. James thinks the yen will move to ¥128.00/$ in the next six months.

(1) If James buys $100,000 worth of yen at today's spot price his potential gain is ___________ and his potential loss is ___________.

A) $100,000; unlimited

B) unlimited; unlimited

C) $100,000; $100,000

D) unlimited; $100,000

(2) If James's expectations are correct, then he could profit in the forward market by _____________ and then _____________.

A) buying yen for ¥128.00/$; selling yen at ¥128.53/$

B) buying yen for ¥128.53/$; selling yen at ¥128.00/$

2. David Dao of United Airlines, Inc. believes the Swiss franc will appreciate versus the U.S. dollar in the coming 3-month period. He has $100,000 to invest. The current spot rate is $0.5825/SF, the 3-month forward rate is $0.5642/SF, and he expects the spot rates to reach $0.6251/SF in three months.

(1) Calculate David's expected profit assuming a pure spot market speculation strategy.

(2) Calculate David's expected profit assuming he buys (or sells) SF three months forward.

3. Jacob Singleton trades currency for Karma Capital of Geneva. Jacob has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/€, while the 30-day forward rate is $1.3349/€.

(1) If Jacob believes the euro will continue to rise in value against the US dollar, so that he expects the spot rate to be $1.3600/€ at the end of 30 days, what should he do?

(2) If Jacob believes the euro will depreciate in value against the US dollar, so that he expects the spot rate to be $1.2800/€ at the end of 30 days, what should he do?

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Patrina Schowalter
Patrina SchowalterLv2
28 Sep 2019

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Short Answer 1-8 [10 points each and each about 1/2 – 1 page double-spaced]:

1. If the spot rate for the Swiss Franc is that 1.05 SF is equal to 1 US $, and the annual interest rate on fixed rate one-year deposits of SF is 0.15% and for US$ is 1.5%, what is the nine-month forward rate for one dollar in terms of SFs? Assuming the same interest rates, what is the 18-month forward rate for one SF in US$s? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the SF get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations for Switzerland as compared to the United States economy?

2. On June 1st, 2017, Sandoz expects to ship 3 million units of a new drug from its Swiss plant to the US that it will sell through pharmacies on 270-day terms at $95 each. Therefore Sandoz will receive payment from these outlets on February 25th, 2018. Assuming that Sandoz needs to cover its expenses in Switzerland and thus wants to hedge its SF/US$ exposure using a forward contract with a Swiss bank, what is the minimum amount of Swiss Francs they should receive on February 25th, 2018 given 9-month forward rate you calculated in problem one for one US $ in terms of SF? What are two other ways Sandoz might hedge its SF/US$ exposure?

3. In his book Manias, Panics and Crashes (see the Introduction and Chapters posted on the class website) Charles Kindleberger explains the three stages of how a financial crisis develops and evolves over time. Please briefly explain these stages and how the Baltic and Mexican Tequila Crises as presented in Hill text and class case presentation follow this economic pattern or paradigm.

4. Toyota, whose global sales are generally dollar denominated, finds it has excess cash of $85,000,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 2.65% or a three-year Yen denominated deposit paying 1.55% since it expects the Yen to appreciate 1.2% per annum against the dollar over the next three years. Using cash flow analysis determine the best currency option in which Toyota should invest. Be sure to show your complete calculations of the annual return on each investment possibility at the end of the three-year term. Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rate. Would your answer change if Toyota revised its outlook for the Yen to appreciate 1.1% per year? Show all calculations!!!

5. Country A has 20,000 units of labor and can produce 2 goods, manufactures and food. A’s producers take 5 units of labor to produce one unit of manufactures and 2 units to produce one unit of food. Country B has 30000 units of labor and takes 3 units to produce one unit of manufactures and 3 units to produce one unit of food. What is price of manufactures in terms of food at which A and B would respectively supply manufactures? What would B export in Adam Smith’s world? What is the amount it could supply?

6. Companies can be hurt by rapid changes in exchange rates even if their initial hedging actions appear reasonable. Explain how the VW case reflects this situation and what it could have done differently to manage the adverse impact of dollar depreciation. 7. Explain how Timberland developed global supply chain problems and then how they developed new logistical and partner relationships that used both IT and a changed physical distribution system to solve these issues.

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