Question

Answer the following questions:

Chapter 9 question 1
1.)Motives for forecasting: Explain corporate motives for forecasting exchange rates.


Chapter 10 question 1
1.) Transaction versus economic exposure
Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its net cash flows in each currency when assessing its transaction exposure?


Chaper 7 Question 2
2.)Locational Artbitrage:assume the following information

                                                       Beal Bank    Yardley Bank
Bid price of new Zealand dollar         $.401          $.398
Ask price of new Zealand Dollar       $.404          $.400

Given the information, is locational arbitrage possible?
If so, explain the steps involved in locational artbitrage,and compute the profit from this arbitrage if you had $ 1 million to use. What market forces would occur to elimate any further possibilities of locational arbitrage?


4.) Triangular Arbitrage Assume the following information

Value of Canadian dollar in U.S dollars          $.90
Value of New Zealand dollar in U.S dollars    $.30
Value of Canadian dollar in New Zealand       NZ$3.02

Given this information, is triangular arbitrage possible? If so explain the steps that would reflect triangular arbitrage and compute the profit from the strategy if you had $ 1 million to use. What market forces would occur to elimate any further possibilities of triangular arbitrage?

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1.) Motives for forecasting: Explain corporate motives for forecasting exchange rates.
Answer:
There are several decisions which can be made with the help of better exchange rates. Every organization is increasingly spreading operations across different parts of the world and an estimate of the exchange rate would help them to estimate their costs and revenues in a better manner. This can also affect the timing decisions and other decisions such as hedging, short-term investing and financing, earnings assessment, long term financing and capital budgeting decisions. For example, if an American entity has to make payment of $1 million Euros after 6 months, but there is the possibility that the Euro would appreciate, the US entity would face losses since it would have to give more number of US dollars to get the Euros....

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