Question 8.MSE.4: a. The dollar is presently worth .8 euros. What is the direc...
a. The dollar is presently worth .8 euros. What is the direct exchange rate of
the euro?
b. The direct exchange rate of the euro is presently valued higher than it was last
month. What does this imply about the movement of the indirect exchange rate of
the euro over the last month?
| Each Quarter during the Year, Sanoma’s Main Business Transactions Will Be to: | Currency Used in Transaction | Expected Movement in Currency’s Value against the U.S. Dollar during This Year | How the Expected Currency Movement Will Affect Sanoma’s Net Cash Flows (and Therefore Value) This Year |
| a. Import materials from Canada | Canadian dollar | Depreciate | |
| b. Export products to Germany | Euro | Appreciate | |
| c. Receive remitted earnings from its foreign subsidiary in Argentina | Argentine peso | Appreciate | |
| d. Receive interest from its Australian cash account | Australian dollar | Depreciate | |
| e. Make loan payments on a loan provided by a Japanese bank | Japanese yen | Depreciate |
c. The Wall Street Journal quotes the Australian dollar to be worth $.50, while the
one-year forward rate of the Australian dollar is $.51. What is the forward rate
premium? What is the expected rate of appreciation (or depreciation) if the one-year
forward rate is used to predict the value of the Australian dollar in one year?
a. A euro $1.25.
b. The indirect value of the euro must have declined over the last month.
c. The forward premium is 2 percent. If the forward rate is used to forecast, the expected degree of appreciation over the next year is ($.51 – $.50)/$.50 = 2%, which is the same as the forward rate premium.