IFM study Guide:

As a reminder I need the individual assignments for the second half of the course:

Page 210; Problem 22

Page 274; Problem 10

Kindly bring a printed copy to the final exam and give it to Maggy or Linda; so she can send
your assignments along with the final exam.

Your study questions:

1. What are the exchange rate systems?

2. Provide an example for each exchange rate system.
3. What is the Bretton Woods agreement?
4. What is the Smithsonian Agreement?
5. What is the European Exchange Rate Mechanism?
6. What is a pegged currency? Give an example.
7. Explain the advantages and disadvantages of a pegged currency.
8. What is the difference between direct and indirect intervention?
9. What is arbitrage?
10. What types of arbitrage exists?
11. You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank
will pay you 13 pesos for a euro. You can buy a U.S. dollar for .9 euros. The bank will
pay you .8 euros for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The bank will
pay you 9 pesos for a U.S. dollar. You have $1,000. Can you use triangular arbitrage to
generate a profit? If so, explain the order of the transactions that you would execute and
the profit that you would earn. If you cannot earn a profit from triangular arbitrage,
explain why.
12. What is purchasing power parity? Why is it important in international financial
management?
13. Assume that the Australian dollar’s spot rate is $.90 and that the Australian and U.S. one-
year interest rates are initially 6 percent. Then assume that the Australian one-year
interest rate increases by 5 percentage points, while the U.S. one-year interest rate
remains unchanged. Using this information and the international Fisher effect (IFE)
theory, forecast the spot rate for one year ahead.
14. The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in
the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the
Mexican peso is $.14. What is the forward rate premium? What is the one-year forward
rate of the peso? Based on the international Fisher effect, what is the expected change in
the spot rate over the next year? If the spot rate changes as expected according to the IFE,
what will be the spot rate in one year?
15. What are the forecasting techniques used by MNCs? Give an example of each.
16. Warden Co. is considering a project in Venezuela, which will be very profi table if the
local currency (bolivar) appreciates against the dollar. If the bolivar depreciates, the
 project will result in losses. Warden Co. forecasts that the bolivar will appreciate. The
bolivar’s value historically has been very volatile. As a manager of Warden Co., would
you be comfortable with this project? Explain.
17. Your employer, a large MNC, has asked you to assess its transaction exposure. Its
projected cash flows are as follows for the next year. Danish krone inflows equal
K50,000,000 while outflows equal DK40,000,000. British pound inflows equal
£2,000,000 while outflows equal £1,000,000. The spot rate of the krone is $.15, while the
spot rate of the pound is $1.50. Assume that the movements in the Danish krone and the
British pound are highly correlated. Provide your assessment asto your firm’s degree of
transaction exposure (as to whether the exposure is high or low). Support your answer.