Instruction:
For the questions that require calculation, clearly show the process by which you obtain the answers. Please write you peer evaluation on top the file that you submit.


Q.1 (20 points) La Verne Corporation sells both home and in foreign countries. The firm finds that a change in the exchange rate has a greater impact on cash outflows than on cash inflows. In order to reduce economic exposure, what would you recommend regarding the volume of sales to foreign countries? Explain the reason for your recommendation.


Q.2 (40 points) Fresno Corporation will have to pay £200,000 in 180 days. It has the following information.
• Spot rate of pound as of today: $1.50.
• 180-day forward rate of pound as of today: $1.47.
• Interest rates are as follows:

U.K. U.S.
180-day deposit rate 2.5% 4.5%
180-day borrowing rate 3.0% 5.0%

• Fresno Corporation forecasted the future spot rate in 180 days as follows
Possible Outcome Probability
$1.43 20%
$1.46 60%
$1.52 20%

(A) Compute the standard deviation of the possible spot rates of British pounds. (20 points)


(B) Describe the actions to be taken for a forward hedge and calculate the real cost of hedging relative to no hedge. (20 points)


Q3. (20 points) Assume that Vermont Company has net payables of 500,000 Mexican pesos that are due in 180 days. The interest rate in Mexico is 8 percent over 180 days, and the U.S. interest rate is 4 percent over 180 days. The spot rate of the Mexican peso is $0.10.

Describe the steps to take for a money market hedge. You need to show clearly the amounts that are related to the actions to take.


Q.4 (20 points) Assume that the following information is available as of today.


U.S. Germany
Real rate of interest required by investors 1% 1%
Nominal interest rate -- 3%
Spot rate -- ($/€)1.08
One-year forward rate -- ($/€)1.12

Find out the nominal interest rate in U.S. In your process for deriving the nominal interest rate, clearly explain which principle(s), i.e. parity, you are using.

Already Tried:
Nothing so far. It's an international finance question that I have 3 days to answer.