If Relative Purchasing Power Parity held what would you expect the GBP/EUR exchange rate to be in 6 months’ time
Answer and show working out with the following maths questions:
Assume the following information
Quoted price
Spot rate of Euro 0.80 USD
90 day forward rate of Euro 0.79 USD
90 day European interest rate 4%
90 day U.S interest rate 2.5
Given the information above, discuss if covered interest arbitrage worthwhile for an US investor who has US dollars to invest (assume the investor invests $1,000,000) Explain with calculations.
2.Read the following information to answer the questions d and e
Newton Co is a UK based multinational company that has the following expected transactions
One month Receipt of $240,000
One month Receipt of $140,000
Three month Receipt of $300,000
Newton Co’s finance manager has collected the information below
Spot rate ($ per £): 1.7820 + 0.0002
One month forward rate ($ per £): 1.7829 + 0.0003
Three months forward ($ per £): 1.7846 + 0.0004
Money market rates for Newton Co:
Borrowing Deposit
One year sterling interest rate 4.9% 4.6%
One year dollar interest rate 5.4% 5.1%
Assume that it is 1 April now
d) Calculate the expected sterling receipts in one month and in three months using the forward market.
e) Calculate the expected sterling receipts in three months using a money market hedge and recommend whether a forward market hedge or a money market should be used
3.Complete the following question
The Gamma Co. have contracted to purchase steel from Beta Co. in the Netherlands at a cost of EUR 20,000,000
Delta bank in Amsterdam quotes USD/EUR as 0.8325 and GBP/USD as 1.3343
Alfa Bank in UK FX quotation for GBP/EUR is 1.1267
1 year money market interest rates for EUR are 2% and for GBP 4% (per annum)
Annualised inflation in the Eurozone is 1% and in the UK it is 3.5%
Calculate the cost in GBP to Gamma Co of conducting the spot rate FX transaction with Delta Bank or Alfa Bank and which would they use?
If Relative Purchasing Power Parity held what would you expect the GBP/EUR exchange rate to be in 6 months’ time? ( base calculations on a spot GBP/EUR rate of 1.1267
4.Answer and show calculations for the following questions below :
A British company is considering investing in Malaysia due to cheaper labour rates and proximity to raw materials used in production
Capital investment in the project would be Malaysian Ringgit (MYR) 11,000,000. The project would last for 4 years producing annual net operating cash flows of MYR 4 million per year
At the end of the project the assets would be sold at an estimated value of MYR 2 million
In calculating the return the firm will use a GBP weighted average cost of capital (WACC) of 8%
The GBP/MYR exchange rate is 5.5000 and is expected to remain stable through the end of Year 1 but is expected to weaken to 5.75 by the end of year 2, 6.00 in year 3 and 6.25 in year 4
Calculate the expected GBP NVP of the USA project showing all workings out?
The company assesses the probability of NPV calculated in the above answer to be 40% and calculates an alternative scenario forecasting an NPV return of £800,000 with a 60% probability. What is the combined weighted expected return