Question
1. Ubiflex Technology Ubiflex Technology expects to receive 25,000,000 Japanese yen 90 days from now. Ubiflex decides to hedge its position by selling Japanese yen
1. Ubiflex Technology
Ubiflex Technology expects to receive 25,000,000 Japanese yen 90 days from now. Ubiflex decides to
hedge its position by selling Japanese yen forward. The current spot rate of the yen is $.0079, while the
forward rate is $.0085. Ubiflex expects the spot rate in 90 days to be $.0080. How many dollars will
Ubiflex receive for the 25,000,000 yen 90 days from now? Show all steps clearly.
2. Suppose that a Richard Mille RM27-03 watch costs 777,000 in Germany and that the current
EUR/USD exchange rate is $1.20. One Canadian dollar is worth $0.82 USDs. Calculate the Canadian
dollar price of a Richard Mille RM27-03 watch. Show all steps clearly.
3. A U.S. investor buys 500 shares of CEMEX (CEMEXCPO.MX ) on the Bolsa Mexicana de Valores
(Mexican Stock Exchange) for 6.8 MXN per share in 2009. The price of CEMEX increases to 13 MXN
per share in 2010 when this U.S. investor sells. The USD was worth 12.05 MXN when the investor
bought CEMEX in 2009. The USD appreciated to 13.7 MXN when the investor sold CEMEX in 2010.
What is the U.S. dollar return of this investment to the investor? Show all steps clearly.
4. Who is Shinzo Abe? What is the inflation goal of Abenomics? What effect will Abenomics have on
the value of the Yen against the USD according to theory? Explain using a diagram.
Compare and contrast the theoretical effects of Abenomics on the value of the Yen with the real-world
experience of Abenomics on the value of the Yen against the U.S. dollar after Abes election in
December 2012.
5. Wisconsin Whiskey and Wurst (3W)
a. 3W is a Wisconsin firm that recently established a European subsidiary with a major Wurst
production facility in Munich. The subsidiary was designed to make the wonderful 3W Wurst in
Germany to export to America. 3W will sell this Wurst throughout Wisconsin. The subsidiary pays its
local employees in Euros. The subsidiary has all of its expenses denominated in Euros. If the Euro
strengthens over the next four years, will the value of 3W be favorably affected, unfavorably affect, or
not affected? Briefly explain.
b. If 3W finances its Munich production facility by borrowing in Euros from BNP Bank how will its
exchange rate exposure change? Why?
Practice Problems 1
Dr. John Spry
International Financial Management
6. Wu Tang Financial
You go to Wu Tang Financial and are given these foreign exchange quotes
You can buy a euro for 18 pesos.
The bank will pay you 17.5 pesos for a euro.
You can buy a U.S. dollar for 0.9 euros.
The bank will pay you 0.85 Euros for a U.S. dollar.
You can buy a U.S. dollar for 17 Mexican pesos.
The bank will pay you 16.5 Mexican pesos for a U.S. dollar.
You have $1,000,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of
the transactions that you would execute, and the profit that you would earn. If you cannot earn a profit
from triangular arbitrage, explain why.
You have $1,000,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of
the transactions that you would execute, and the profit that you would earn. If you cannot earn a profit
from triangular arbitrage, explain why.
7. Short Answer
a. What is definition of the current account?
b. What is definition of the capital and financial account?
c. What is the approximate position of the U.S. trade balance on services?
d. What is the approximate position of the U.S. trade balance on goods and services?
e. What is the approximate position of the U.S. capital and financial account?
f. What was the Gold Standard? How did it affect exchange rates?
g. What was Bretton Woods Agreement? When was Bretton Woods Agreement in effect? How did it
affect exchange rates?
8.Suppose that a BMW costs E 45,000 in Germany and that the current USD/EUR exchange rate is
.7624.
Calculate the dollar price of the BMW
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