Differentiate between the different types of foreign exchange exposure that multinational companies usually face when engaging in cross-border transactions
Differentiate between the different types of foreign exchange exposure that multinational companies usually face when engaging in cross-border transactions
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question 4
a) Differentiate between the different types of foreign exchange exposure that multinational
companies usually face when engaging in cross-border transactions
b) Assume that the one-year interest rate is 3% (per annum) in the UK and 2% (per annum)
in the Euro area. Also, assume that the current spot exchange rate of one pound to the euro
is €1.1500/£ and that the corresponding one-year forward rate is €1.1400/£.
i) Provide calculations to show whether the Interest Rate Parity (IRP) theory holds.
ii) A UK-based investor has £200,000 to invest for a year either in the Euro area or the UK.
Using the above information, determine which investment will generate a higher return for
iii) Discuss the extent to which your results in i) and ii) above provide support to the
Covered Interest Rate Parity (CIRP) condition.
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