Finance 338 Time spent: 2 hours 30 minutes

Jonathan Wiley Name: Daniel Gabriel -Emmanuel

jowiley@oru.edu Date: 11/11/2020

Homework Project b-7

Pre-question: In the space below, write down the third and fourth commandments given in
the Ten Commandments (Ex. 20:2-17; Deut. 5:6-21). The short versions are fine.

3. Do not use the name of the Lord in vain

4. Keep the Sabbath day holy

Questions (worth 5 raw points per numerical question, and show your work):

1. What are five additional factors that must be considered for multinational financial
management? Include a short phrase describing each.

1. Different currency denominations: this means that certain amounts of subunits of

currency such as 100 cents make one US dollar and 100 pennies make one Great
British Pound, and other currencies hold the same principles
2. Political risk: this means that converting currency or calculating currency in certain
countries like China with political turmoil and disorder means it is riskier to convert
currency in those particular countries where it is less secure, and the political situation
is close to being jeopardy.
3. Economic and legal ramifications: this mans that economic and legal ramifications
must be heavily considered in order to avoid legal penalties as well as suffering from
the economic consequences(penalties) like decreased value of a currency.
4. Role of governments: the role of governments is to be considered because most
international exchanges are not regulated by the markets, but they are instead
controlled by the international corporations and governments.
5. Language and cultural differences: this must be considered due to the efficient
communications and assessments on how culture determine the targets of a business.

2. A. What is an exchange rate?

An exchange rate is the units of one currency that can be purchased by one unit of another.

B. What is a soft or weak currency?

Soft or weak currency fluctuates with a lower value than that of other countries, such as the
currency in developing countries

C. What is a strong or hard currency?

Strong or hard currency is globally traded that has a stable value and is reliable. This is

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 because of a long-term stability of purchasing power, financial conditions and due to their
stable political situation

D. To what do depreciation and appreciation refer regarding currencies?

Depreciation is when the value of a currency decreases in value and appreciation is the
opposite because appreciation is when the value of a given currency increase in value.

3. A. What does it mean if a forward currency is selling at a discount relative to the

dollar?

If a forward currency is selling at a discount that is relative to the dollar then this means that
the spot rate will be less than what the forward rate is.

B. What does it mean if a forward currency is selling at a premium relative to the

dollar?

When a forward currency is selling at a premium that is relative to the dollar this means that
the spot rate is less than the forward rate.

4. A. What is a cross exchange rate?

A crossover rate is the exchange rate between any two currencies. Such as: GBP and USD.

B. What is a spot exchange rate?

Spot exchange rate is the rate that is paid for delivery of the currency “on the spot”

C. What is a forward exchange rate?

A forward exchange rate is the rate that is paid for future delivery of currency (contract)

5. A. What is interest rate parity?

Interest rate parity means that investors should expect to earn the same return in all countries
after adjusting for risk. Essentially this means that investors should expect to earn the same
return on similar-risk securities in al countries.

B. Include an equation for interest rate parity.

Forward exchange rate (1+k h)

=
Spot exchange rate (1+ k f )

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6. A. What is purchasing power parity?
Purchasing power parity is essentially the law of one price and it implies that the same
products cost approximately the same amount in different countries taking the exchange rate
into consideration.

B. Give an equation for purchasing power parity.

Ph = Pf (Spot rate)

7. A. What are Eurocredits?

Eurocredits are floating rate loans that are tied to London Inter Bank Offer Rate (LIBOR)

B. What are Eurodollars?

Eurodollars are U.S. dollars that are deposited outside the U.S.

C. What are Eurobonds?

Eurobonds are international bonds that sold in countries other than the country in whose
currency the bond is denominated.

D. What are foreign bonds?

Foreign bonds are international bonds that are denominated in the currency of the country in
which issued

E. What is an ADR?
An ADR is an abbreviation of American Depositary Receipt. This is a negotiable certificated
issued by U.S. banks which represent a certain number of shares in a foreign company’s
stock.

8. A. What is exchange rate risk?

Exchange rate risk is when the foreign exchanges of currency may be taxed locally and what
is left of it may be taxed again by the nation receiving the currency in the exchange. For
instance: Euros could be taxed in the UK and the American dollars converted may be taxed
in the U.S. as well.

B. What is political risk?

political risk is the potential actions by a host government that would reduce the value of a
company’s investment. It is where a nation may place strict policies on exchanges of
currency or resources or issues that arise from political unrest or hardships that can effect

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 international trade or the currencies of the countries’.

9. A television set sells for $525 U.S. dollars. In the spot market, $1= 125 Japanese yen. If
purchasing power parity holds, what should be the price (in yen) of the same television
set in Japan?
A. 35,625 yen
B. 45,625 yen
C. 55,625 yen
D. 65,625 yen
E. 75,625 yen

125 Japanese yen

$ 525U . S dollars × =65,625 yen
$ 1 U . S dollar

=65,625 yen

10. A currency trader observes the following quotes in the spot market:

137 Japanese yen = 1 U.S. dollar

1.52 Swiss francs = 1 British pound
1 British pound = 1.86 U.S. dollars

Given this information, what is the exchange rate between the Japanese yen and the
Swiss franc (SwF)?

A. 134.116 yen / SwF

B. 150.880 yen / SwF
C. 167.645 yen / SwF
D. 184.409 yen / SwF
E. 201.174 yen / SwF

137 Japanese yen 1.86 U . S dollars 1 British pound

× × =167.6447368
1 U . S dollar 1 British pound 1.52 Swiss francs
=167.645 yen/SwF

11. Assume that 90-day U.S. securities have a 2.9% annualized interest rate, whereas 90-
day Canadian securities have a 3.2% annualized interest rate. In the spot market, 1
U.S. dollar can be exchanged for 1.25 Canadian dollars. If interest rate parity holds,
what is the 90-day forward rate exchange between U.S. and Canadian dollars (in terms

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 of Canadian dollars per U.S. dollar)?

A. C$ 1.1258/$1
B. C$ 1.2509/$1
C. C$ 1.3760/$1
D. C$ 1.5637/$1
E. C$ 1.6637/$1

forward exchange rate (1+ k h )

=
spot exchange rate (1+ k f )
Home – Canada
For – US
90 1
= 3.2/100 = 0.032
360 4
kh = .032/4 = 0.008
kf = . 0.029/4=0.00725

12. A currency trader observes that in the spot exchange market, 1.00 U.S. dollar can be
exchanged for 11.65 Mexican pesos or for 7.213 Danish krone. What is the cross-
exchange rate between the peso and the krone; that is, how many pesos would you
receive for every krone exchanged?

13. I hereby certify that all work contained in this homework assignment is exclusively my
own. I have abided by all aspects of the Honor Code during the preparation of this
assignment, and I pledge to uphold the Honor Code by continuing to personally abide
by it and by reporting all violations that I observe. I recognize that copying another
student’s work is plagiarism and an Honor Code violation. Furthermore, I realize that
although consulting other students as I complete this assignment is permissible,
ultimately the work that I submit must be exclusively my own.

Signature: Daniel Gabriel-Emmanuel

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