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FINAL EXAM NAME: ___________________
INSTRUCTION: Answer the following questions in the solution boxes. Also Show your calculation or explain your answer in the solutions boxes. The answers without appropriate calculation steps will not be graded.
Suppose annual inflation rates in the US and Mexico are expected to be 3% and 10% respectively, over the next two years. If the current spot rate is MXP12/$, then relative purchasing power parity suggests that the exchange rate in two years will be approximately _________.
P10.88
34.60
P13.69
None of the above
SOLUTION:
P&G is a US based MNC and has operations in Turkey. P&G expects 120,000,000 TRL cash flows in 6 months, however due to significant volatility, cash flows are expected to fluctuate as much as 20%. In other words P&G can get TRL120m, TRL96m or TRL144m depending on the economic conditions. Based on their expectations, P&G treasurers choose to sell TRL96m forward at TRL1.90and buy TRL48m put option at TRL1.90 both with six month maturities. The cost of the put option is $0.02. Assume that the spot exchange rate turns out to be TRL2.10/$ at the expiration and cash flows materialize as TRL144,000,000. What will the net USD cash-flows of P&G and what will be the cost of acquiring one US dollar?
50,526,316 and TRL1.9000/$
25,263,158 and TRL1.9200/$
74,829,474 and TRL1.924/$
None of the above
SOLUTION:
Firm “J” is a U.S.-based MNC with net cash inflows of Swedish Krone and net  cash inflows of Swiss Francs. These two currencies are highly negatively correlated in their movements against the dollar (i.e. as SEK appreciates, CHF depreciates and vise versa). Firm “K” is a U.S.-based MNC that has the same exposure as Firm “J” in these currencies, except that its Swiss Francs represent cash outflows. Which firm has a higher exposure to exchange rate risk?
Firm “J”.
Firm “K”.
J and K have same level of exposure
Neither firm has any exposure
SOLUTION/EXPLANATION:
Use the following spot and…