Activity I

IFE. Beth Miller does not believe that the IFE holds. Current one-year interest rates in Europe are 5 percent, whereas one-year interest rates in the U.S. are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.00, what is Beths percentage return from her strategy?

c. If the spot rate of the euro in one year is $1.08, what is Beths percentage return from her strategy?

d. What must the spot rate of the euro be in one year for Beths strategy to be successful?

Acitivity II

Forecasting Exchange Rates of Currencies in Developing Countries Some U.S.-based MNCs have business in developing countries in which it is difficult to hedge their exposure to exchange rate risk. Their forecasts of the currencys future exchange rate is subject to much error because the currencies in these countries tend to be very volatile, and could possibly depreciate by 20% or more in a given year.. Write a short essay on how MNCs that have receivables in these currencies might be able to use exchange rate forecasts to prepare for possible weak currency scenarios, so that they can assess whether they will have sufficient dollar cash inflows to cover their debt payments.