International Monetary Fund and International Financial Statistics - Essay Example

A U.S. broker has posted the following quotes (in USD) for the share of an electronic firm: Buying rate =100 and selling rate =110. The exchange rates for one euro are: Buying (bid) $1.4550 and Selling (ask) = $1.4950 net. Assume you are an investor living in Europe and answer the following questions: a How much will you pay in dollars if you buy 1000 shares of that firm? How much will you pay in euro? b How much will you receive (dollars and euros) if you sell 1000 shares? c What will be the total costs and net proceeds in each case (dollar and euros), if the broker charges a 0.2% commission for each transaction? Answer: a) An investor would pay 100,000 in dollars if he would buy the shares of that firm. In Euros this would amount to 100,000/1.4950=66889.63. The ask rate is being used because the buyer of the share would first sell the Euros in the American market to get a 100,000 dollars to buy the shares. b) If you sell the shares you would receive 110,000 in USD. The buying rate would be used because the seller would have to buy the Euros from the market after selling in dollars. Therefore they would receive 110,000/1.4550 = 75601.37 Euros c) The cost of the broker when buying the shares= 100,000 *0.2%= 200 In Euros this cost would be 200/1.4950=133.77 Cost in Dollars = 100200 Cost in Euros =67023.409 Cost of the broker commission when selling the shares= 110,000 * 0.2%= 220 In Euros this cost would be= 220/1.4550=151,20, as the investor would buy from Dollars to pay the commission. The total proceeds would be 109,780 USD and 75752.58 Euro. 2 You are the manager of an American pension fund and decide, on January 5, to buy ten thousand shares of British Airways listed in London. You sell them on February 5. Here are the quotes that you can use: January 5 British Airways share price (?): Buying = 3.50 and selling = 3.52 Exchange rate (dollars per pound): Buying =1.5000 and selling = 1.5040 February 5 British Airways share price (?): Buying = 3.81 and selling 3.83 Exchange rate (dollars per pound): Buying =1.4500 and selling = 1.4540 You must pay the U.K. broker a commission of 0.2% of the transaction value (on the purchase and on the sale). (a) What is your sterling rate of return on the operation? (b) What is your dollar rate of return on the operation? Answers: Buying Cost in Pounds: 3.5 *10,000 = 35000 ? Buying Cost in USD: 35,000 *1.5= 52500 USD Commission on Purchase: 35000*0.2%=70? Commission on Purchase USD= 70 * 1.5= 105 Sale Proceeds in Pounds: 3.83*10,000= 38,300 ? Proceeds in USD: 38,300 * 1.4540 = 55688.2 Commissions on Sale : 38,300 * 0.02% = 76.8 ? Commission on Sale in USD: 76.8 *1.4540= 111.37 a) Sterling rate of return Total Investment : 35000+ 70= 35070? Total proceeds: 38300-76.8= 38376.8 Profit= 3306.8 Return= 9.429% b) Dollar Rate of return Investment in dollars: 52500+105=52605 Total Proceeds in USD: 55688-111.37= 55576.63 Profit in USD: 2971.63 Return: 5.648% 3 You are a U.S. investor and wish to buy ten thousand shares of Club Mediterranee (“Club Med”). You can buy them either in Paris or in London. You ask the brokers to quote you net prices (no commissions paid). There are no taxes on foreign shares listed in London. Here are the quotes: London (in ? per share): Buying at 56.75 and selling at 58.125 Paris (in € per share) Buying at 78 ? and selling at 78 ? The exchange rates are: Dollars per pound: buying = 1.9450 and selling = 1.9950 Dollars per euro: buying = 1.4850 and selling = 1.4855 What is your total dollar cost if you buy the Club Med shares at the cheaper place? Answers: If you buy the shares in London: 10,000 * 58.125 = 581250 ? If you buy the shares in Paris: 10,000 * 78. 75=787500 € Cost in Dollars in London Purchase= 581,250 * 1.9450=11,30,531 USD would be required. The buying price is used because investor would first sell dollars to get the pounds to buy the shares. Cost in USD of Paris Purchase: 787500*1.4850=1169437.5 USD The cheaper price to buy the shares would be 11, 30,531 USD. 4 Assume the following quotes: ii Mexican peso/USD 9.3850 – 80 iii South African rand/USD 6.1200 – 300 iv USD/GBP 1.6320 – 35 a What should be the exchange rate between the pesos and the sterling (pesos per GBP)? b What should be the exchange rate between the pesos and the rand (pesos per rand)? Answers: a) The question asks for a crossover rate between Peso and Pound sterling. To find this rate first assume the above given rate in the following format. Peso/ USD= 9.3850 USD/ GBP= 1.63 We will first convert the Peso / USD into USD/Peso= 1/9.3850=0.1065 To get Peso per GBP = USD/ GBP divided by USD/Peso= 1.63/0.1065=15.29 b) To get the rate of peso per rand, we convert both rates in USD USD/ peso= 0.1065 USD/rand= 0.1633 The crossover rate would be Peso/rand= 0.1633/ 0.1065= 1.533 5 Suppose Dow Chemical receives the following quotes: $0.009369 – 71 for the yen and $0.003675 – 6 for the Taiwan dollar (NT$). a How many US dollars will Dow Chemical receive from the sale of 50 million yens? b What is the dollar cost to Dow Chemical of buying one billion yens? c How many NT$ will Dow Chemical receive for 500,000 USD? d How many yens will Dow Chemical receive for NT$ 2000 million? Answers: a) If Dow Chemical sells 50 million yen it would receive: 50,000,000 * 0.009371= 468550 USD b) The buying price would be $0.009369. Therefore the total cost in dollars of buying 1 billion yens would be 0.009369 billion USD. c) To sell 500,000 USD the bid price would be 500,000/0.003675= 136054421 NT d) Dow Chemical will sell the NT to buy USD. They can buy 0.003676*2000= 7.352 million USD. Now they will buy yen for 7.352 million USD which is = 784.715 million yen. 6 The exhibit below presents the aggregated balance of payments five countries of which you are required to conduct a comparative analysis. EXHIBIT: Balance of Payments of Five Major Countries (Billions of U.S. dollars) A B C D. E Current Account 39 -1 94 7 -167 Exports 284 510 409 279 680 Imports -256 -436 -308 -300 -877 Trade Balance 28 74 101 -21 -197 Balance of Services 17 -41 -54 15 87 Net Income 3 -2 56 19 -18 Current Transfers -9 -32 -9 -7 -39 Capital & Financial Account -33 -1 -88 -11 168 Direct Investment -12 -33 -23 -21 -11 Portfolio Investment -24 -5 29 -22 308 Other Fin; & Capital flows -2 36 -128 25 -32 Net Errors & Omissions 5 1 34 7 -97 Official Reservse -6 2 -6 4 -1 Source: Adapted from International Monetary Fund, International Financial Statistics, Yearbook Answer: The balance of payment for any country is an integral factor of determining the exchange rate value of a currency. This value is not only affected by the trade balance. This is because some countries try to control the value of their currencies. To control the value of the currency a country has to trade its currency in the international market. If we look at the graph above we can see that country E has the largest trade deficit, whereas country C has the largest trade surplus. If we look at the capital and financial account country E has the largest balance. If we look at official reserves, country D has the largest reserves. This is because the FDI play a vital part in determining the total official reserves of a country. Country E represents the type of balance of payments that can be seen for USA. 7 Harrison Equipment of Denver, Colorado purchases all of its hydraulic tubing from manufacturers in mainland China. The company has recently completed a corporate-wide initiative in six sigma/lean manufacturing. Completed oil field hydraulic system costs were reduced by 4% over a one year period, from $880,000 to $844,800. The company is now worried that all of the hydraulic tubing that goes into the systems (making up 20% of their total costs) will be hit by the potential revaluation of the Chinese yuan, if some in Washington get their way. How would a 12% revaluation of the yuan against the dollar impact total system costs? Assume that the current exchange rate is 8.28 yuans per USD. Answers: As Harrison imports the tubing from China, it will be effected if there is an appreciation in the value of Yuan. A 12% revaluation would mean that the new rate would be 8.28*0.88= 7.2864 yuans per USD would be the new exchange rate after the revaluation. The 20% cost that is affected by the yuan price= 844,800* .20= 168,960 USD Cost of machinery under the old system= 168,960*8.28= 13,98,988 yuan However with the changed exchange rate the company would have to pay 1398988/7.2864= 192000 USD. This would result in a total loss of 23040 USD due to exchange rate fluctuations. 8 Toyota manufactures most of the vehicles it sells in the United Kingdom in Japan. The base platform for the Toyota Tundra truck line is ?1,650,000. The spot rate of the Japanese yen against the British pound has recently moved from ?197 per pound to ?190 per pound. How does this change the price of the Tundra to Toyota's British subsidiary in British pounds? Answers: Any appreciation in currency prices result in a loss to the importer. This is the reason that most exporters try to keep the prices of their currencies on the low side. The price of the Tundra in the old rate was = 1,650,000/197 = 8375.6345 The price under the new rate is 1650000/197=868421 Thus a total price increase in pounds of 308.57 is being faced. 9 Ranbaxy, an India-based pharmaceutical firm, has continuing problems with its cholesterol reduction product's price in one of its rapidly growing markets, Brazil. All product is produced in India, with costs and pricing initially stated in Indian rupees (Rps), but converted to Brazilian reais (R$) for distribution and sale in Brazil. In 2004 the unit volume was priced at Rps12,500, with a Brazilian reais price set at R$825. But in 2005 the reais appreciated in value veruss the rupee, averaging Rps17.5/R$. In order to preserve the reais price and product profit margin in rupees, what should the new rupee price be set at? Answer: The previous exchange rate was= 12500/825= 15.15 The new price should be set at 17.5*825= 14437 Rps. 10 A dollar-Swiss franc swap with a maturity of seven years was contracted by Papaf Inc. three years ago. Papaf swapped $100 million for CHF 250 million. The swap payments were annual, based on the then market interest rates of 5% in dollars and 2,5% in CHF. In other words, Papaf Inc. contracted to pay dollars and receive CHF. The current spot exchange rate is 1.65 CHF/$, and the current interest rates are 3% in CHF and 6% in $. a What is the swap payment at the end of year 3? Does Papaf pay or receive? b What is the value, to Papaf, of the swap contract today? c On the final date of the swap, the spot exchange rate is 1.5 CHF/$. What is the final swap payment at the end of year 7? Answer: a) Interest earned in CHF= 250* 3.0%= 7.5 million CHF Interest earned in Dollars= 100*6.0%= 6 million USD The swap payment at the end of year three would be 6 million USD for 7.5 million CHF b) The current spot rate is 1.65 CHF/USD Therefore Papaf can get 165 million CHF by paying an amount of 100 million USD Therefore the value of the contract to Papaf is 250-165= 85 million CHF c) The final date of payment would depend on the mode of delivery. The two parties can adjust the difference or simply pay the full amounts. If the two parties exchange full amounts than 100 million USD would be paid by Papaf and it would receive 250 CHF. However mostly only the difference is adjusted. Therefore under the new rate 100 million USD would fetch 150 CHF. This would mean that Papaf would only receive 100 million CHF payment which is in excess of the market rate. Read More