1. Our company (based in Europe) just agreed to buy 10 earth moving machines from Caterpillar (based in USA) at a total price of 24,000,000 euros. Suppose the current exchange rate is $1.25=1 euro. The machines will be manufactured in the US, and then delivered to our company in Europe 6 months from today. Payment of 24,000,000 euros will be made to Caterpillar upon delivery. a. Which company is undertaking exchange rate risk in this case (justify your answer)? b. Identify the type of exchange rate risk. c. What could the company that is assuming the exchange rate risk do to reduce the risk in this case? 2. The inflation rate forecast for the next 12 months in the US is 3%, while in Japan it is 10%. a. What should happen to the US/Japan exchange rate over the next year? b. Calculate by how much the exchange rate should change. (show the calculation) 3. The nominal interest rate is the US is 2%, while in England it is 7%. a. If the exchange rate is $1=2 pound, and it is expected to remain constant over the next year can you make money in this situation? Why and demonstrate how (show your calculations). b. What should the exchange rate do over the next 12 months in order for the profit to not exist (provide calculations to determine what the exchange rate should be 12 months from now). c. Calculate the one-year forward rate based on the information (show formula and calculation) 4. You are leaving the U.K. on your way back to the U.S. You have 800 Euros in your pocket. As you are waiting for your flight, you take a quick walk around the airport. On your walk you find an i-pad is priced at 410 Euros in one store, 350 pounds sterling in another store, and you know the price in the U.S. is $450. If you want to have the 'best buy' in which currency should you make your purchase if 0.91 pound sterling =$1, and $1=1.2 Euros? 5. Complete the following table: (show your calculations) [Note: the column under US is the number of yen pounds and euros to purchase one $US. So, 118.46 yen to buy $1 ]