The data is what I need help with That's what the answer is that I'm confused about I came up with the following for part one, it's part 2 that I don't get 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 6 17 2017 0 893 0 8843 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 $ 4465000 00 5000000X 893 4465000 00 Assuming you fully hedge your FX exposure in the forward market, how many US dollars will you receive in 6 months $5049191 45 5000000X 893 4465000 00 4465000 00 8843 5049191 45 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 1 893 8843 1 01 Premium of 1 Short and Long Run Exchange Rate Risk Exercise Worksheet (v1 2) In this exercise you are asked to choose a currency in which it is assumed you have foreign exchange exposure both in trade (short run) and investment (long run) In this exercise you are asked to find both spot and forward exchange rates for a chosen currency and also inflation rates associated with that currency You are encouraged to read through the exercise first before choosing your currency to ensure the requested data is accessible via the links provided Short Run Exchange Rate Risk Assume you have a trade receivable denominated in a foreign currency of your choice that is payable to you by your customer in 6 months At the current spot rate the trade receivable is worth the equivalent of US$5,000,000 To find the current spot rate for the chosen currency pair go to http www hsbcnet com gbm fxcalc disp 1 Enter 5,000,000 in the Convert box, United States dollar in the From box, and your chosen currency in the To box Click on Go for the spot rate, which will be expressed in European terms, that is, units of foreign currency per one US dollar Enter the name of the chosen currency, the date the site is accessed, and the spot rate in European terms in the table below To find a 180 day forward rate for the currency pair, go to http www hsbcnet com gbm fwcalc disp For Amount you can just enter 1 and enter US dollars in the Buy box and the foreign currency in the Sell box For Value Date enter 6 Months and click Go for the forward rate (Clicking on the Inverse box will switch the rate from European to American terms ) Enter the one year forward rate in the table below Make sure the forward rate is expressed in the same way as the forward rate, that is, in European terms 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 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 Assuming you fully hedge your FX exposure in the forward market, how many US dollars will you receive in 6 months 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 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 2 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 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 Please note currencies are grouped according to their region Americas (where the United States dollar may be found), Asia Pacific, Europe, and MENA Please advise your instructor should this or any other link in the assignment be broken 2 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 Sep 21, 2024

The data is what I need help with. That's what the answer is that I'm confused about. I came up with the following for part

The data is what I need help with. That's what the answer is that I'm confused about. I came up with the following for part one, it's part 2 that I don't get:

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

6/17/2017

0.893

0.8843

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? $4465000.00

5000000X.893=4465000.00

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

$5049191.45

5000000X.893=4465000.00

4465000.00/.8843=5049191.45

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%

.893/.8843=1.01

Premium of 1%

Short- and Long-Run Exchange Rate Risk Exercise

Worksheet (v1.2)

In this exercise you are asked to choose a currency in which it is assumed you have foreign exchange exposure both in trade (short-run) and investment (long-run). In this exercise you are asked to find both spot and forward exchange rates for a chosen currency and also inflation rates associated with that currency. You are encouraged to read through the exercise first before choosing your currency to ensure the requested data is accessible via the links provided.

Short-Run Exchange Rate Risk

Assume you have a trade receivable denominated in a foreign currency of your choice that is payable to you by your customer in 6 months. At the current spot rate the trade receivable is worth the equivalent of US$5,000,000. To find the current spot rate for the chosen currency pair go to http://www.hsbcnet.com/gbm/fxcalc-disp.[1] Enter 5,000,000 in the Convert box, United States dollar in the From: box, and your chosen currency in the To: box. Click on Go for the spot rate, which will be expressed in European terms, that is, units of foreign currency per one US dollar. Enter the name of the chosen currency, the date the site is accessed, and the spot rate in European terms in the table below.

To find a 180 day forward rate for the currency pair, go to http://www.hsbcnet.com/gbm/fwcalc-disp#. For Amount you can just enter 1 and enter US dollars in the Buy box and the foreign currency in the Sell box. For Value Date enter 6 Months and click Go for the forward rate. (Clicking on the Inverse box will switch the rate from European to American terms.) Enter the one-year forward rate in the table below. Make sure the forward rate is expressed in the same way as the forward rate, that is, in European terms.

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

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?

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

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.[2] 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

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] Please note currencies are grouped according to their region: Americas (where the United States dollar may be found), Asia-Pacific, Europe, and MENA. Please advise your instructor should this or any other link in the assignment be broken.

[2] 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.