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Suppose the spot exchange rate for the Canadian dollar is Can$1.06 and the six-month forward rate is Can$1.03.
Required:
(a) Which is worth more, a U.S. dollar or a Canadian dollar?
(Click to select)U.S. dollarCanadian dollar
(b)

Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$2.74? (Enter your answer as directed, but do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Cost in U.S dollar $
(c) Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?
(Click to select)discountpremium
(d) Which currency is expected to appreciate in value?
(Click to select)U.S. dollarCanadian dollar
(e) Which country do you think has higher interest rates—the United States or Canada?
(Click to select)the United StatesCanada

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Irving Heathcote
Irving HeathcoteLv2
29 Sep 2019

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You are the Vice President of Finance for Exploratory Resources, headquartered in Houston, Texas. In January 2010, your firm’s Canadian subsidiary obtained a six-month loan of 130,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. $.8993/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2010 contract (face value = C$130,000 per contract) was quoted at U.S. $.8926/Canadian dollar.

If the bank does hedge with the forward contract, what is the maximum amount it can lose? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Kanab Co. and Zion Co. are U.S. companies that engage in much business within the U.S. and are about the same size. They both conduct some international business as well.

Kanab Co. has a subsidiary in Canada that will generate earnings of about C$20 million in each of the next 5 years. Kanab Co. also has a U.S. business that will also receive about C$1 million (after costs) in each of the next 5 years as a result of exporting products to Canada that are denominated in Canadian dollars.

Zion Company has a subsidiary in Mexico that will generate earnings of about 1 million pesos in each of the next 5 years. Zion Co. also has a business in the U.S. that will receive about 300 million pesos (after costs) in each of the next 5 years as a result of exporting products to Mexico that are denominated in Mexican pesos.

The salvage value of Kanab’s Canadian subsidiary and Zion’s Mexican subsidiary will be zero in 5 years. The spot rate of the Canadian dollar is $.60 while the spot rate of the Mexican peso is $.10. Assume the Canadian dollar could appreciate or depreciate against the U.S. dollar by about 8% in any given year, while the Mexican peso could appreciate or depreciate against the U.S. dollar by about 12% in any given year.

Which company is subject to a higher degree of translation exposure? Explain.

Where can you find currency exchange rates and cross rates? At OANDA.com, the currency website. At this site's main page, click on the Currency Converter tab found at the top of the page and then below that, choose "Converter" to convert one currency into another.

Question 1: Several years ago the Wall Street Journal reported that the “indirect” exchange rate between the Canadian and US dollars was $0.9507 CAN per $1.00 US (or $0.9507 Canadian dollars per one US dollar). Using the OANDA website, identify the current “indirect” exchange rate between these two currencies in terms of $CAN per one $US?

Question 2: Has the U.S. dollar appreciated or depreciated relative to the Canadian dollar over this two-year time period? Explain your answer.

Question 3: Suppose the exchange rate between the U.S. dollar and the Swedish krona is 6.55 kronas per one U.S. dollar and the exchange rate between the British pound and the dollar is 0.641 pounds per U.S. dollar. Determine the cross rate between kronas and pounds. Your answer should be expressed as Swedish kronas per one British pound.

(B) Calculate the premium or discount of the British pound in the forward market where the spot rate is $1.982 US per one pound and the 90 day forward rate is $1.967 US per one pound. Be sure that you calculate the percent amount of the premium or discount AND also identify the amount as either a premium or discount.

(C) The spot rate of the Brazilian Real (BRL) is $0.44 US. The one-year U.S. interest rate is 5.75% and the one-year Brazilian interest rate is 9.52%.

Question 1: Assuming the existence of interest rate parity, determine the forward premium or discount of the Brazilian Real (be sure to identify whether it is a premium or a discount).

Question 2: Given the forward discount for the Real in question 1, now estimate the forward exchange rate of the Brazilian Real.

Question 3: Given interest rate parity, assume that the forward rate of the Brazilian Real is the same as the spot rate, one BRL = $0.44 US. Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 5.75%.

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