International Bussiness an Asian Perspective Chapter 9-11

Topics: United States dollar, Inflation, Foreign exchange market Pages: 4 (1518 words) Published: March 25, 2013
9.1)  The interest rate on South Korean government securities with one-year maturity is 4% and the expected inflation rate for the coming year is 2%.  The US interest rate on government securities with one-year maturity is 7% and the expected rate of inflation is 5%.  The current spot exchange rate for Korea won is $1 = W1,200.  Forecast the spot exchange rate one year from today.  Explain the logic of your answer. Drawing on what we know about the Fisher effect, the real interest rate in both the US and South Korea is 2%.  The international Fisher effect suggests that the exchange rate will change in an equal amount but in an opposite direction to the difference in nominal interest rates.  Hence since the nominal interest rate is 3% higher in the US than in South Korea, the dollar should depreciate by 3% relative to the South Korean Won.  Using the formula from the book:  (S1 - S2)/S2 x 100 = i$ - iWon   and substituting 7 for i$, 4 for iWon, and 1,200 for S1, yields a value for S2 of $1=W1,165. 9.3) You manufacture wine goblets. In mid-June you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in mid-December. You expect the yen to rise from its present rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6 percent a year. What should you do? The simplest solution would be to just wait until December, take the ¥400,000 and convert it at the spot rate at that time, which you assume will be $1=¥100. In this case you would have $4,000 in mid-December. If the current 180-day forward rate is lower than 100¥/$, then a forward contract might be preferable since it both locks in the rate at a better level and reduces risk. If the rate is above ¥100/$, then whether you choose to lock in the forward rate or wait and see what the spot does will depend upon your risk aversion. There is a third possibility also. You could borrow money from a bank that you will pay back with the ¥400,000 you will receive (400,000/1.03 =...
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