Concept explainers
Videos
Spot and Forward Rates Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market.
a. Is the dollar selling at a premium or a discount relative to the franc?
b. Does the financial market expect the franc to strengthen relative to the dollar? Explain.
c. What do you suspect is true about relative economic conditions in the United States and Switzerland?
a.
To explain: In relation to franc whether the dollar is selling at premium or discount.
Spot Rate:
Spot rate may be regarded as the value at which a security or commodity is readily sellable. The spot rate is driven by the forces like value which are likely to be paid by the buyers and the sellers depending on the security’s market value and its future market value. The spot transaction is settled within one or two business days from the ‘horizon’ commonly known to be the trade day. Irrespective of any other factors the settlement takes place on the spot date at the agreed spot rate or price.
Explanation of Solution
Given,
The exchange rate for Country S franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market.
Therefore, in the given case the spot rate is SF 1.09 and forward rate is SF 1.11 in 90-day forward market. Hence, the forward rate tends to be more than the spot rate and hence in terms of franc currency the dollar is selling at premium.
Since the exchange rate for Country S franc for dollars is quoted, the forward rate is more than the spot rate of the currency. Hence, the dollar that is the currency to be exchanged is said to be selling at premium.
Hence, in relation to Country S franc the dollar is said to be selling at premium.
b.
To explain: Financial market’s expectation for franc to enhance relative to the dollar.
Forward Rate:
Forward rate can be defined as the interest rate derived from the spot rate which is equal to the total value of the return of a long term investment including the adjustments for the carrying costs to analyze future interest rate. In general, it may be regarded as fixation of interest rates to fulfill a financial obligation arising in near future.
Explanation of Solution
Given,
The exchange rate for Country S franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market.
From the above mentioned statement it is apparent that dollar is selling at premium. Also, in such transactions if one currency decreases or sells at discount the other increases or sells at premium. Hence in the given transaction if dollar is selling at premium, considering its forward rate, the related currency that is Swiss franc is expected to depreciate. In nutshell, it will take more Swiss francs to buy a dollar.
While dealing with spot and forward market we come across different transactions. The transactions involves two different currencies, if one of them depicts the tendency of being sellable at premium, it is implied that the other currency is selling at discount. But the currency at discount is expected to depreciate in terms of its value in relation to the currency in which it is quoted as the spot rate along with the forward rate implies that the currency is depreciating with time and more of franc will be required to buy a unit of dollar.
Hence, Country Sfranc is expected to depreciate in future in terms of its value relative to dollar.
c.
To explain: Relative economic conditions in Country UandCountry S
Explanation of Solution
The afore said currency values depict the relative conditions of the two economies. The currency at discount value implies that the country is facing a phase of inflation with relatively higher rate than the country with currency which is at premium.
Therefore, the economic conditions of the respective countries reveal that Country S is facing higher level of inflation in its economy than Country U.
- The inflation rate in the country is inversely proportional to the currency’s performance in the market.
- If the currency is at discount in the market then the economy is said to be facing a comparatively higher degree of inflation.
Hence, the economy can be analyzed on the basis of the performance of its currency in the financial market as the decrease in the same shall shoot up the inflation rate of the country and vice-versa.
Want to see more full solutions like this?
Chapter 31 Solutions
EBK CORPORATE FINANCE
- 9. Calculating Payments [LO3] The Bandon Pine Corporation's purchases from suppliers in a quarter are equal to 75 percent of the next quarter's forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20 percent of sales, and interest and dividends are $110 per quarter. No capital expenditures are planned. Projected quarterly sales are shown here: Sales Q1 $2,250 Q2 $2,730 Sales for the first quarter of the following year are projected at $2,475. Calculate the company's cash outlays by completing the following: Payment of accounts Wages, taxes, other expenses Long-term financing expenses (interest and dividends) Total Q3 $2,390 Q4 $2,190 Q1 Q2 Q3 Q4arrow_forwardThe average daily net transaction accounts of a local bank during the most recent reserve computation period is $341 million. The amount of average daily reserves at the Fed during the reserve maintenance period is $26.20 million, and the average daily vault cash corresponding to the maintenance period is $5.8 million. (Example13-2). a. Under the rules effective in 2020, what is the average daily reserve balance required to be held by the bank during the maintenance period? b. Is the bank in compliance with the reserve requirements?arrow_forwardWhat are the LSS and characteristics of LSS tools used in a research study? What is Lean Six Sigma and what is the possible benefits of using Lean Six Sigma? What are the seven LSS tools, could you please explain the characteristics of each tool, and state how the tool would be used to in a case study? How Lean Six Sigma brings a hint of all three traditional types of research (qualitative, quantitative, and mixed methods) to bear on Case Study research and business solutions?arrow_forward
- Select a real-world case situation. Use this case which you either know about already or have identifiedthrough research and address the following questions in essay format:.i. Outline and discuss what “triggered” the regulatory body to intervene? ii. How effective do you think the response was to such a crisis? iii. Outline and discuss two ways that could be used to strengthen the current regulatoryarrow_forwardle Shema actencial de theophile cautionarrow_forwardYou plan to purchase a $200,000 house using either a 30-year mortgage obtained from your local savings bank with a rate of 7.25 percent, or a 15-year mortgage with a rate of 6.50 percent. You will make a down payment of 20 percent of the purchase price. Calculate the amount of interest and, separately, principal paid on each mortgage. What is the difference in interest paid? Calculate your monthly payments on the two mortgages. What is the difference in the monthly payment on the two mortgages?arrow_forward
- Problem 2-21 Financial Statements Use the following information for Ingersoll, Incorporated. Assume the tax rate is 23 percent. 2020 2021 Sales Depreciation $ 19,073 $17,436 1,811 1,886 Cost of goods sold 4,729 4,857 Other expenses 1,021 899 Interest 870 1,001 Cash 6,292 6,916 Accounts receivable 8,190 9,877 Short-term notes payable 1,320 1,297 Long-term debt 20,770 25,011 Net fixed assets 51,218 54,723 Accounts payable 4,624 5,094 Inventory 14,538 15,438 1,700 1,768 Dividends Prepare a balance sheet for this company for 2020 and 2021. (Do not round intermediate calculations.) Cash Assets Accounts receivable Inventory INGERSOLL, INCORPORATED Balance Sheet as of December 31 2020 2021 $ 6,292 $ 6,916 8,190 9,877 14,538 15,438 Drov 14 of 20 Nearrow_forwardProblem 6-35 Financial Break-Even Analysis The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Martin Enterprises needs someone to supply it with 152,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost $1,920,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $162,000. Your fixed production costs will be $277,000 per year, and your variable production costs should be $10.60 per carton. You also need an initial investment in net working capital of $142,000. The tax rate is 22 percent and you require a return of 12 percent on your investment.…arrow_forwardYou plan to purchase a $100,000 house using a 30-year mortgage obtained from your local credit union. The mortgage rate offered to you is 8.25 percent. You will make a down payment of 20 percent of the purchase price. Calculate the amount of interest and, separately, principal paid in the 225th payment. Calculate the amount of interest paid over the life of this mortgage.arrow_forward
- What are the back ground of Sears problem, and what are the general of the problem statements? How to Create problem statements and applicable research questions? What are the lessons learned from Sears that business people or organization should avoid?arrow_forwardWhat are the research assumptions, and the research limitations, please give examples for each one, and explain how the limitation in the example might be mitigated? What are the research delimitations and give one example please. Hhow Biblical principles are related to reliability and validity.arrow_forwardWhat are the six sources of data collection and please help to explain the qualitative data collection methods. What is the thematic analysis? How to anticipated themes in a research proposal?arrow_forward
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning