1. A U.S. company sells goods to a Canadian company for 8 million Canadian dollars, purchases supplies from Canadian companies for 7 million Canadian dollars, and incurs interest expense of 4 million Canadian dollars on Canadian loans. The exchange rate is C$/US$1.014. (1) Calculate the US$ value of the company’s cash flows; (2) Would the US$ value of the cash flows increase or decrease with an exchange rate of C$/US$.98 and how much? Show how you derive your answers.

2. A U.S. company expects to receive 1 million British pounds in 1 year. The U.S. deposit rate for 1 year is 4% and the borrowing rate for 1 year is 9%. The British deposit rate for 1 year is 3% and the borrowing rate for 1 year is 8%. The British pound spot rate is $1.61 and the 1-year forward rate is $1.62. Calculate the value of these exports in 1 year in U.S. dollars if the company enters into a money market hedge. Show how you derive your answer. “

3. MLC Audio is a U.S.-based MNC that has subsidiaries in three European countries. The subsidiaries frequently remit their earnings back to the parent company. This year, the Portuguese subsidiary generated a net outflow of €2,000,000, the Spanish subsidiary generated a net inflow of €2,500,000, and the Italian subsidiary generated a net inflow of €500,000. Calculate the net inflow or outflow as measured in U.S. dollars this year. The exchange rate for the euro is $1.31. Show how you derive your answer.

4. In Period 1, the predicted value of the Mexican peso was $0.13 and the realized value was $0.14. In period 2 the predicted value was $0.14 and the realized value was $0.12. In period 3, the predicted value was $0.13 and the realized value was $0.15. Calculate the mean absolute forecast error as a percentage of the realized value. Show how you derive your answer.

5. The U.S. one-year interest rate is 5% and its expected annual inflation rate is 3%. The 1-year Chinese interest rate is 10% and its expected annual inflation rate is 8%. You plan to invest $100,000 in the Chinese market for one year and you believe that PPP holds. The spot exchange rate of a Chinese RMB is $0.159. Calculate the percentage yield on your investment? Show how you derive your answer.

6. The current spot rate of the Mexican peso is $0.13 and the 180-day forward rate is $0.14. The180-day deposit rate is 1% in the U.S. and 4% in Mexico. An investor plans to use covered interest arbitrage for a 180-day investment of $1 million. (1) Calculate how many U.S. dollars you will have after 180 days; and (2) the amount of the gain or loss. Show how you derive your answers

7. The bid rate of an Australian dollar is $1.055 and the ask rate is $1.065 at Bank 1. The bid rate of the Australian dollar is $1.04 and the ask rate is $1.05 at Bank Y. Calculate your gain if you use $1,000,000 and execute locational arbitrage. Show how you derive your answer.

8. The spot rate of the British pound is $1.61. The premium on a British pound call option is $.02 and the exercise price is $1.65. The option will be exercised on the expiration date, if at all. The spot rate on the expiration date is $1.66. (1) Calculate the profit as a percent of the premium paid. Show how you derive your answer; and (2) Will the option be exercised?

9. One ADR of a German company sells for $55.50 and the ADR is convertible into 2 shares of stock. The spot rate of the euro is $1.31. Calculate the share price of the firm in euros. Show how you derive your answer.

10. At the end of the year, a U.S. company has expected cash flows of ¥1,000,000 from Japanese operations, CHF200,000 from Swiss operations, and €350,000 euros from German operations. At the end of the year, the yen value is expected to be. $.011; the Swiss franc value is expected to be $1.08, and the euro value is expected to be $1.31. Calculate expected dollar cash flows for the company by currency and total. Show how you derive your answer.

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