1. The Brazilian economy has expanded significantly. This growth has created a large demand for loanable fund by their local firms.How do these conditions affect the forward discount of the Brazilian real?
2. Eagles Company has most of its revenues in the United States. A big portion (nearly half) of its expenses require outflows to Indonesian firms for various inputs for their production.These purchases result in outflows in Indonesian rupiah.Eagles competitors have little or no international business.How will Eagles be affected if the rupiah weakens?
3. Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to Eurozone countries. All of its earnings are derived from its exports. The exports are denominated in euros. Reed Co. (of the U.S.) is about the same size as Quartz Co. and generates about the same amount of earnings in a typical year. It has a subsidiary in Germany that typically generates about 40 percent of its total earnings. All earnings are reinvested in Germany and therefore not remitted. The rest of Reed's business is in the U.S. Which company has a higher degree of translation exposure? Briefly, explain.
4. If interest rate parity exists, would a forward hedge be more favorable, the same as, or less favorable than a money market hedge on euro payables? Explain.
5. What is covered interest arbitrage and what situation is necessary for triangular arbitrage to be executed?