QuestionQuestion

1. The spot ER between the Chinese remnimbi and the Japanese yen is that each remnimbi buys 10 yen. If the interest rates are 2% in japan and 6% in China, what is the forward ER? EXPLICATE.

2. Expound on operating FE exposure. Assume we have a foreign affiliate in Thailand and our parent firm in the States, and the Thai baht revalues relatively to the US $. Also, assume we have 2 affiliates in the UK and in Greece. Assume that the currencies of our 2 affiliates (the pound and the euro) devalue relatively to the $. If you want to decrease any FE negative effects, what would be appropriate to do in terms of sourcing , production and sales in any of the aforementioned currencies.? You may produce, source and sell in any of the above nations.

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1:
Current spot rate is: 1 Remnimbi is equivalent to 10 yen.
Interest rate in Japan = 2%
Interest rate in China = 6%
Since the interest rate in China is higher than Japan, the Chinese Remnimbi would depreciate so that the interest rate gains are offset by exchange rate loss and the real interest rate stays the same, as per the theory of interest rate parity....
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