I just need help finding the data and completing PART TWO I don't know where to find the forecasted rates Foreign Currency Date Current Spot Rate in European terms FX per 1 US dollar Six Month Forward Rate in European terms FX per 1 US dollar Euro 12 9 17 0 8499 0 8396 Based on the data above, answer the following questions At the current spot rate how much in the foreign currency are you owed in 6 months $4,249,500 Assuming you fully hedge your FX exposure in the forward market, how many US dollars will you receive in 6 months $5,061,338 73 Is the foreign currency selling in the forward market at a premium, i e it appreciates relative to the spot rate, or a discount, i e , it depreciates relative to the spot rate Provide numbers to support your answer 1 01 or 1 premium Long Run Exchange Rate Risk Assume you have undertaken a 3 year investment abroad with expected cash flows denominated in your chosen currency At the current spot rate those cash flows are expected to provide a positive net present value (NPV) in US dollar terms Based on relative purchasing power parity you are asked to estimate future spot rates over the next three years based on comparative inflation data 1 With that data complete the table below S 0 Current Spot Rate in European Terms (Foreign currency per US dollar) E(S t ) Expected Exchange Rate Spot Rate in t Years in European Terms (Foreign currency per US dollar) h US Annual Inflation Rate in the United States h FC Annual Foreign Country Inflation Rate 0 8499 Using the data above and textbook equation (18 3) E(S t ) S 0 1 (h FC h US ) t and assuming the estimated inflation rate in Year 1 also holds for Years 2 and 3, please respond to the following Based on relative purchasing power parity, estimate S 1 Based on relative purchasing power parity, estimate S 2 Based on relative purchasing power parity, estimate S 3 Based on relative purchasing power parity, has the foreign currency appreciated or depreciated against the US dollar Explain Based on relative purchasing power parity, has the NPV of the investment project increased or decreased in US dollar terms Explain 1 Sources of Inflation data include http stats oecd org for OECD countries and http data worldbank org indicator FP CPI TOTL ZG at the World Bank site It is viewed important to be consistent in the definition and source of inflation numbers for the US and the other currency that you use for the relative PPP equation The most basic definitions of inflation are consumer price index (CPI), producer price index (PPI), and GDP deflator Estimates of the next years inflation are preferred but it is also common to use the past years inflation as the best estimate of next years and subsequent years inflation You are encouraged to share any useful websites for this data you find with the class

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 06, 2024

I just need help finding the data and completing PART TWO. I don't know where to find the forecasted rates Foreign Currency Date Current Spot

I just need help finding the data and completing PART TWO. I don't know where to find the forecasted rates

Foreign Currency	Date	Current Spot Rate in European terms: FX per 1 US dollar	Six -Month Forward Rate in European terms: FX per 1 US dollar
Euro	12/9/17	0.8499	0.8396

Based on the data above, answer the following questions:

At the current spot rate how much in the foreign currency are you owed in 6 months?

$4,249,500

Assuming you fully hedge your FX exposure in the forward market, how many US dollars will you receive in 6 months?

$5,061,338.73

Is the foreign currency selling in the forward market at a premium, i.e. it appreciates relative to the spot rate, or a discount, i.e., it depreciates relative to the spot rate? Provide numbers to support your answer.

1.01 or 1% premium

Long-Run Exchange Rate Risk

Assume you have undertaken a 3-year investment abroad with expected cash flows denominated in your chosen currency. At the current spot rate those cash flows are expected to provide a positive net present value (NPV) in US dollar terms. Based on relative purchasing power parity you are asked to estimate future spot rates over the next three years based on comparative inflation data.[1] With that data complete the table below.

S₀ = Current Spot Rate in European Terms (Foreign currency per US dollar)	E(S_t) = Expected Exchange Rate Spot Rate in t Years in European Terms (Foreign currency per US dollar)	h_US= Annual Inflation Rate in the United States	h_FC = Annual Foreign Country Inflation Rate
0.8499

Using the data above and textbook equation (18.3) E(S_t) = S₀ [1 + (h_FC - h_US)]^t and assuming the estimated inflation rate in Year 1 also holds for Years 2 and 3, please respond to the following:

Based on relative purchasing power parity, estimate S_1.

Based on relative purchasing power parity, estimate S_2.

Based on relative purchasing power parity, estimate S_3.

Based on relative purchasing power parity, has the foreign currency appreciated or depreciated against the US dollar? Explain.

Based on relative purchasing power parity, has the NPV of the investment project increased or decreased in US dollar terms? Explain.

[1] Sources of Inflation data include http://stats.oecd.org/ for OECD countries and http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG at the World Bank site. It is viewed important to be consistent in the definition and source of inflation numbers for the US and the other currency that you use for the relative PPP equation. The most basic definitions of inflation are consumer price index (CPI), producer price index (PPI), and GDP deflator. Estimates of the next years inflation are preferred but it is also common to use the past years inflation as the best estimate of next years and subsequent years inflation. You are encouraged to share any useful websites for this data you find with the class.