Question 4. (10 points) Exchange rates for several countries are shown below. Th
ID: 2738101 • Letter: Q
Question
Question 4. (10 points) Exchange rates for several countries are shown below. The MLC Company which is based in the U.S. does business with companies in those countries.
Yen per $1 $ per pound Peso per $1
Spot 94.72 1.57 12.85
30-day forward 93.25 1.59 12.96
90-day forward 92.5 1.62 13.05
180-day forward 91.6 1.65 14.05
a. Is the U.S. dollar appreciating or depreciating against the Japanese yen? Explain.
b. Is the U.S. dollar appreciating or depreciating against the British pound? Why?
c. B. Is the U.S. dollar appreciating or depreciating against the Mexican peso? Why?
d. The U.S. company orders merchandise from companies in Japan, Britain, and Mexico, and pays in the foreign currency of each country at the end of 3 months. From a foreign exchange standpoint, would it be to the advantage of the U.S. company to pay any of the suppliers now instead of waiting 3 months? Why or why not?
e. From (d) above, who bears the foreign exchange risk, the U.S. company or the foreign suppliers? Explain.
Explanation / Answer
a As MLC will get lesser and lesser amount of Yen per $ as the time progresses, USD is depreciating against Yen. b As MLC will get more and more USD per British pound as the time progresses, the USD is depreciating against British pound. c As MLC will get more peso against per USD as time progresses, USD is appreciating against Mexican Peso. d As USD is depreciating against Yen and British pound , it is better that the payables in Yen and British pound is paid now instead of paying later on. e As MLC has to pay in foreign currency, the foreign exchange risk is with the buyer and not with the foreign supplier.
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