ASSIGNMENT COVER

REGION: Harare
PROGRAMME: Bachelor of Commerce In Banking &Finance INTAKE: 30

NAME OF STUDENT: Simbarashe S Mashiri PIN: P1670264C

MAILING ADDRESS: mashirisimba@gmail.com

CONTACT TELEPHONE/CELL: 0779 818 581 I.D NO: 59054382V50

COURSE NAME: INTERNATIONAL FINANCE COURSE CODE: BBFH 308

ASSIGNMENT NO .e.g. 1 or2: 2 DUE DATE: 14.03.2020
ASSIGNMENT TITLE: Questions 1&2

MARKER’S COMMENTS:

OVERALL MARK: MARKERS’S NAME

MARKER’S SIGNATURE DATE:

 1. (a) The diagram below depicts international parity relationships in equilibrium.

Difference in Difference in actual

national interest A or expected inflation
rates

B C D

Difference E Expected change in

between forward spot rates
and spot rates

Letter A is the Fisher effect. The Fisher Effect is an economic theory created by economist
Irving Fisher that describes the relationship between inflation and both real and nominal interest
rates. The Fisher effect state that the real interest rate equals the nominal interest rate minus the
expected inflation rate, therefore real interest rates fall as inflation increases, unless nominal rate
increase at the same rate as inflation

Letter B is the Interest Rate Parity (IRP).It states that as a result of market forces the forward
rate differs from the spot rate by an amount that sufficiently offsets the interest rate differentials
between two currencies and then covered interest arbitrage is no longer feasible and the
equilibrium state is achieved .When IRP exist the rate of return achieved from covered interest
arbitrage should equal the rate of return available in the home country.

Letter C depicts the International Fisher Effect. It state that the difference between the nominal
interest rate in two counties is directly proportional to the changes in the exchange rate of their
currencies at any given Time. It is based on current and future nominal interest rates and it is
used to predict spot and future currency movement
Letter D, depict the Purchasing Power Parity relationship, it state that spot exchange rates
between currencies will change to the differential in inflation between countries .It can be
Absolute purchasing Power Parity (APPP) or Relative Purchasing Power Parity (RPPP) .APPP it
states that price levels adjusted for exchange rates should be equal between countries where one
unit of currency has same purchasing power globally. While RPPP states that the exchange rate
of one currency against another will adjust to reflect changes in the price levels of the two
countries

Letter E depicts forward rate as an unbiased estimator of the future spot rate .Forward rate as an
unbiased estimator of the future spot rate when the expected future spot rate is equivalent to the
forward rate.

1 (b)

(i) If you trade using these forex quotations, how many EUR, NZD and GBP do you
have at departure? [6]

(a)USD1=EUR1.304
Therefore USD1000 =1000*1.304
=EUR1304

(b) USD1=NZD0.67
Therefore USD1000=1000*0.67
=NZD670

(c)USD1=GBP1.9
Therefore USD1000=1000*1.90
=GBP1900

On point of departure I will be having EUR1304; NZD600 and GBP1900

(ii) If you return with EUR300, NZD1 000 and GBP75 and the prevailing exchange rates
are unchanged, how many USD will you have after trading?

(a)USD1=EUR1.305
1
That is EUR1= USD
1.305
 300
Therefore EUR300=
1.305

=USD 229.89

(b) USD1=NZD0.69
1
That is EUR1 =USD
0.69

100
Therefore NZD100=
0.69

=USD144.93

(c) USD1=GBP1.95

1
That is GBP1 =USD
1.95

75
Therefore GBP75 =
1.95

=USD38.46

On point of return I will be having 229.89+144.93+38.46 =USD413.28

 2. “Foreign exchange forecasting is vital for multinational corporations”. Discuss.
[25]

Economic globalization is an irreversible trend that have taken world economies by force. There
is an increasing interdependence of the world economies where there is the growing scale of
cross-border trade of commodities and services, huge flow of international capital and wide and
rapid spread of technologies and this has led to the emergence of Multinational
corporations .Multinational corporations are corporate organizations that owns or controls
production of goods or services in at least one country other than its home country
(Wikipedia) .These corporates and investors need to know how their investment will change in
their currency and for reporting purposes as it is a norm that they have one reporting currency
that they prepare their financial statement in .In order to facilitate this phenomenon there is need
to have efficient foreign exchange system that act as a linkage between different currencies in
which the multinationals corporates trade in . Foreign exchange rate is the price of the domestic
currency stated in terms of another currency, in simpler terms a foreign exchange rate compares
one currency with another currency. When Multinational corporates enter into Forex market they
should enter cautiously and come prepared and this is when forecasting of foreign exchange
come into play. Forecasting of foreign exchange means predicting current and future market
trends by utilizing existing data and various facts.
Forecasting of foreign exchange rates is mainly done by many analyst and financial institutions
for different currency pairs and they use two different types of exchange rate forecast that is
fundamental forecast and technical forecasts, which are periodically reported by banks and
analysts covering different currencies and financial news agencies such as Reuters and
Bloomberg collect these forecast from the experts to produce periodic reports .The
Multinationals Corporates will then follow these foreign forecasts in order to make various
decisions .Hence forecasting of foreign exchange is very vital to multinational corporates in
various ways which will be discussed in this essay.

International transactions are usually settled in the near future hence exchange rate forecasting is
very vital to multinational corporates in the evaluating the foreign denominated cash flows
involved in international transaction .Forecasting is very important to evaluate the benefits and
risk attached to the international environment.

Forecasting exchange rates is also vital to multinational corporates in their quest to make
informed hedging decisions. Hedging is a risk management strategy that deals with reducing or
eliminating the risk of uncertainty with the aim to restrict the losses that may arise due to
unknown fluctuations in the investment prices and to lock the profits therein. Multination
corporates usually deals in derivatives. These are financial contracts that derive their value from
an underlying real asset, such as a stock. The multinational corporates constantly face the
decision of whether to hedge future payables and receivables in foreign currency hence
forecasting foreign currency value become vital in the decision to be taken.

In the course of doing business the multinational corporates approaches the financial institutions
for short term financing thus they access several different currency and the idealistic situation
when they borrow is to have financing that has a low interest rate and a weaker in value currency
over the financing period .Forecasting foreign exchange rates is this regards becomes very vitals
in order to know the future values of the finances.

On the other hand Multinational corporates sometimes may have substantial amount of excess
cash available for a short term and they may wish to put the funds into investments for a short
term period as well .Their end desire would like to have an investment with a high interest rates
and strength in value over the investment period .This can be enhanced through the use of
forecasting foreign exchange rates, hence it is important to have this kind of facility that can
predict the future positions of currencies and interest rates.

Capital budgeting and capital projects are very important to multinationals corporates world
over, before venturing in to a business internationally the parent company takes into account the
fact that they will periodically require the exchange of currencies and analysis can be completed
only when all estimates cashflows are measured in the parent‘s local currency hence it is vital to
forecast the foreign rates fluctuation for the future.

Forecasting of foreign exchange rate is also vital to multinational corporates in assessment of

their earning form various projects in different countries .They would want to make informed
decisions on whether to reinvest their earnings in a foreign country or to remit earning back to
the parent. These decision making are usually influence by exchange rate forecasts. If a strong
foreign currency is expected to weaken significantly, the parent may prefer to expedite the
remittance earnings before the foreign currency weakens. If a foreign currency is expected to
gain value in the near future the parent can chose to reinvest in that country as they will benefit
from the strengthening of the currency. Forecasting of foreign currency is also vital to
multinational corporates as earnings of subsidiary are reported they are consolidated and
transferred into the currency representing the parent firm’s home country.

.
References

John N. Kallianiotis.International Financial Transactions and Exchange Rates

Loyd Kazunga. International finance Module FNCE309

www.coursehero.com › file › Parity-relationship

https://efinancemanagement.com/derivatives/hedging

https://www.thebalance.com/hedge-what-it-is-how-it-works-with-examples-3305933

https://www.slideshare.net/seyam2/forecasting-exchange-rates-70916304

https://corporatefinanceinstitute.com/resources/knowledge/economics/international-fisher-effect-
ife/