B. Short Answer Questions

11. Yazoo Inc. is a U.S. firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $.01. The yen exchange rate was $.008 three months ago, $.0085 two months ago, and $.009 one month ago. Yazoo uses todays spot rate of the yen as its forecast of the spot rate in one month. However, it wants to determine the maximum expected percentage decline in the value of the Japanese yen in one month based on the value at risk (VaR) method and a 95 percent probability. Use the exchange rate information provided to derive the maximum expected decline in the yen over the next month.

12. You use todays spot rate of the Brazilian real to forecast the spot rate of the real for one month ahead. Todays spot rate is $.4558. Use the value-at-risk method to determine the maximum percentage loss of the Brazilian real over the next month based on a 95 percent confidence level. Use the spot exchange rates at the end of each of the last 6 months as shown below to conduct your analysis. Forecast the exchange rate that would exist under these conditions.

End of Month

1 2 3 4 5 6

Value of Brazilian real

$.4251 .4203 .4196 .4523 .4417 .4558

13. Zebra Co. is a U.S. firm that obtains products from a U.S. supplier and then exports them to Canadian firms. Its exports are denominated in U.S. dollars. Its main competitor is a local company in Canada that sells similar products denominated in Canadian dollars. Is Zebra subject to transaction exposure? Briefly explain.

14. Reese Co. will pay 1 million British pounds for materials imported from the U.K. in one month. Reese Co. sells some goods to Poland, and will receive 3 million zloty (the Polish currency) for those goods in one month. The spot rate of the pound is $1.50, while the spot rate of the zloty is about $.30. Assume that the pound and zloty are both expected to depreciate substantially against the dollar over the next month and by the same degree (percentage). Will this have a favorable effect, unfavorable effect or no effect on Reese Co. over the next year? Explain.