Question 1

(a)Jaguar Car Manufacturer has full manufacturing costs of their S-type sedan of 22,803. They sell the S-type in the UK with a 20% margin for a price of 27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?

(4.5 marks)

(b)Assume that the spot exchange rate of the British pound is $1.73 against the US dollar. How will this spot rate adjust according to Purchasing Power Parity (PPP) if the United Kingdom experiences an inflation rate of 7% while the United States experiences an inflation rate of 2%?

(3 marks)

(c)The Big Mac index is considered a good candidate for the application of the law of one price and measurement of under or overvaluation of a currency. Develop an FIVE argument as to why this is a good idea.

(5 marks)

(Total 12.5 marks)

QUESTION 2

(a)John thinks that the U.K. pound will cost $1.43/ in six months. A 6-month currency futures contract is available today at a rate of $1.44/. If John were to speculate in the currency futures market, and his expectations are correct, which strategies would earn him a profit?

(3.5 marks)

(b)Jensen is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Jensen thinks the yen will move to 128.00/$ in the next six months. If Jensen 's expectations are correct,what should Jensen do in order to profit from changing currency values?

(5 marks)

(c)Compare and contrast TWO features of foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.

(4 marks)

noted : i need this answers before 5pm, malaysia