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Financial report on spot rates, arbitrage and international profits (2009)

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  1. Spot rates
    1. Explain which currency is expected to appreciate and by what annual percentage
    2. According to Purchasing Power Parity, which country should have higher inflation
    3. Which exporter would benefit from the change in spot rates?
    4. Describe the accounts of balance of Payments. How it can help determine exchange rate
  2. Arbitrage
    1. Calculate the forward premium or discount on the £
    2. How much profit you could make if you begin by borrowing £1 000 000?
    3. Show how you could make a profit if you start with $1 000 000?
    4. Explain the differences between speculation and arbitrage
  3. Exposures
    1. Calculate if you should go unhedged or use a forward market hedge
    2. Calculate the value in £s of your money in 6 months if you were to use a money market hedge
    3. Calculate the minimum you would receive in £s if you bought this put option
    4. Questions a), b), and c) concern Transaction Exposure. Explain the difference between Transaction Exposure and Operating Exposure. Describe the four techniques discussed in class to reduce Operating Exposure. Finally briefly discuss Translation Exposure and how it differs from Transaction and Operation Exposure
  4. International profits
    1. Calculate the return to an American investor
    2. Calculate the return to a French investor who invests 15 000 euros
    3. Calculate is return after converting all his money back into euro
    4. Describe the different methods that multinational firms use to bring back their profits from foreign countries. Include a description of transfer pricing. Also, explain why dividends are not a preferred method to transfer profits back to the parent company

This report explains which currency is expected to appreciate and by what annual percentage and, according to Purchasing Power Parity, which country should have higher inflation. The assignment describes the accounts of balance of Payments and how this balance can help determine exchange rates. We also try to explain the difference between Transaction Exposure and Operating Exposure and the different methods that multinational firms use to bring back their profits from foreign countries. Extract: "According to Purchasing Power Parity, which country should have higher inflation? According to the Purchasing Power Parity, when there is more inflation in a country, its currency will go down. In our case, we want the Euro to go down in order to have parity. For example, if we assume that the exchange rate is $1/Euro and that US inflation is 2% and Europe inflation is 0%, we know that the $ is depreciated by 2%, which make an exchange rate of $1.02/Euro. In our case, the $ is expected to appreciate, so to have the Purchasing Power Parity, Europe should have higher inflation than the United States in one year."

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