International Finance Assignment example
Finance & Accounting
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International Finance Table of Contents Table of Contents 2 Answer 1 3 Answer 2 5 Answer 3 7 Answer 4 8 Answer 5 8 Answer 6 9 Answer 7 10 Identification and Management of Risk 11 International Parity Theories 13 References 14 Answer 1 a) Spot rate ?/SFr = SFr1.9816 Or SFr/?…


According to the interest rate parity, the relationship between the forward premium or discount and interest rate differential is given by (Wang, 2009, p.51) The Forward rate and spot rate are in ? and Ih is the interest rate in UK and If is the interest rate in Switzerland. Therefore, if the interest rate parity holds, then the interest rate in Switzerland is lower than interest rate in UK because if the foreign interest rate is lower than home interest rate the forward rate (foreign currency in terms of home currency) exhibits a premium (Madura, 2009, p.215). b) UK interest rate = 4.0000% Singapore interest rate = 3.1875% Spot Rate (?/S$) = S$3.7348 or (S$/?) = ?0.2678 > {(1 + 0.04) / (1 + 0.031875)} - 1 > 0.007874 or 0.79% (annualized) Therefore, Forward Rate (S$/?) = ?0.2678 (1 + 0.007874) > ?0.2699 or S$3.7051 c) Taking the equation from part b), > 0.036 = {(1 + 0.04) / (1 + ISFr)} - 1 > 1+ ISFr = 1.04 / 1.036 = 1.00386 > ISFr = 0.0039 or 0.39% Answer 2 i. Kennedy Plc, a Canadian company, faces foreign exchange rate risk because it is expecting to make and receive payments in US$ within three months i.e. 90 days. The payments to suppliers in 3 months will be US$10,560,000. If US$ strengthens in 3 months, the company is likely to face losses on account of increased amount of payment. ...
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