CHAPTER 27

Managing International Risks

Answers to Select Problem Sets

1. a. 94.7050
b. 94.6780
c. Yen is at premium (dollar is at discount).
d. Premium = .0066, or .66%
e. From interest rate parity, ryen = .0084 or .84%
f. 94.6161 yen = $1
g. Inflation in Japan over the 3 months is expected to be .09% less than in
the United States.

3. a. Nominal Exchange Rate = R3, 083 = $1

b. Real value of rupiah fell by 63%

4.

5. b.

6. Zero

7. It can borrow the present value of €1 million, sell the Euros in the spot market,
and invest the proceeds in an 8-year dollar loan.

8. a. Pinkerton’s return =.0745, or 7.45%

b. Butterfly’s return = .028, or 2.8%
c. Her return in yen = .0316, or 3.16%.

10. a. The dollar is selling at a forward premium on the rand.

b. Annual % premium = -7.18%
c. The forecast is: $1 = 7.9263 rand
d. $12,616.23
11. We can utilize the interest rate parity theory:
rrand 0.0162 1.62%
If the three-month rand interest rate were substantially higher than 1.62%, then
you could make an immediate arbitrage profit by buying rands, investing in a
three-month rand deposit, and selling the proceeds forward.

17. a. Pesos invested = 500,000 pesos

Dollars invested = 37,834.36

b. Total return in pesos = 10%

Total return in dollars = -9.14%
c. There has been a return on the investment of 10% but a loss on the
exchange rate.