Harmony is a South African mining company that exports 24 ounces of gold to the US. Gold is priced in US dollars but Harmony's workers are paid in rand (the currency of South Africa). The current price of gold is 1,798 dollars per ounce. The current exchange rate is 18.48 rand (R) per $1. Harmony's current mining costs are R14,000 per ounce. Expected one-year inflation rates are 2 in the U.S. and 5 in South Africa (in%). If the exchange rate in one year is consistent with PPP, what is the gold price that would maintain Harmony's profits constant in real terms? Enter your answer with no decimals (so enter 9.8 as 10)
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- Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?Purple Corp starts a subsidiary in a foreign country in 2020; the subsidiary has the peso as its functional currency and has enjoyed very small inflation over the last few years. The subsidiary has Cash 40,000 pesos and Accounts Payable totalling 25,000 pesos. Both were generated throughout the fiscal year. Currency exchange rates for 1 peso are as follows:Jan. 1 $0.15 US = 1 peso; Dec. 31 $0.21 US = 1 peso; 2018 Average $0.18 US = 1 peso What amount should Purple Corp's consolidated balance sheet report for these two items in US Dollars. Cash = Accounts Payable =Lost Pigeon Aviation, a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for ¥694 million, but the Japanese firm has 60 days before it must make the payment to Lost Pigeon Aviation The spot exchange rate is ¥132.78 per dollar, and the 60-day forward rate is ¥134.72 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar? The yen is trading at a discount in the forward market. In the forward market, the yen is trading at a premium.
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- Dalia Ltd, a UK exporter, expects a receipt of 1.7m Canadian dollars (C$) for sure in one year from now. Dalia has no use for C$ currency and will exchange it into sterling (£). Assume that the Canadian dollar’s spot exchange rate now is C$=£0.57, the one-year forward rate is C$=£0.52, and the discount rate is zero. Dalia may receive an additional C$2.5m one year from now if it agrees a deal with a new Canadian customer. The probability of this deal being agreed is 0.7. If the deal is not agreed (probability 0.3) Dalia receives no payment from the new customer. Suppose for parts (a) and (b) that the spot rate in one year is C$=£0.50. ⦁ Assume Dalia chooses to enter into a forward exchange contract for the maximum possible receipt of C$4.2m. What actions will the firm take and what will be the value of its net receipts in £, if in one year: ⦁ the new deal is agreed?⦁ the new deal is not agreed? What will be the expected value of Dalia’s net receipt in £? ⦁ Assume now that Dalia chooses…Currently, the GBP/USD rate is 1.5011 and the six-month forward exchange rate is 1.5261. The six-month interest rate is 7.6% per annum in the U.S. and 5.7% per annum in the U.K. Assume that you can borrow £1,000,000 or its equivalent in USD. How much do you make/lose if you borrow the foreign currency and invest locally? (USD, no cents)The 6-month interest rate in the US is 12.25% p.a. The 6-month interest rate in Canada is 15.25% p.a. The spot rate is US$0.8203/Canadian$ and the 6-month forward rate is US$0.8113/Canadian$. For a transaction size of US$700,000, how can an investor take advantage of the situation without taking undue risks? Ignore transaction costs and income taxes