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3) What Can a Firm Do to Manage the Exchange Rate Risk of Foreign Currency Borrowing?

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17. If the spot rate of the Malaysian ringgit is $.30 and the six month forward rate of the ringgit is $.32, what is the forward premium or discount on an annual basis? A. premium; about 14.5% B. discount; about 14.5%
* C. premium; about 13.3% D. discount; about 13.3% E. premium; about 16.7%

Solution: use Equation (5-4) [(.32 - .30)/.30] x (360/180) = 13.3%

18. If the spot rate of the Israel shekel is $.32 and the six month forward rate is $.30, what is the forward premium or discount on an annual basis? A. discount; 11.5% B. premium; 11.5% C. premium; 12.5%
* D. discount; 12.5% E. premium; 22.5%

Solution: use Equation (5-4) [(.30 - .32)/.32] x (360/180) = -12.5%
19. If the Canadian dollar is equal to $.86 and the Brazilian real is equal to $.28, what is the value of the Brazilian real in terms of Canadian dollars?
* A. about .3256 reals B. about .3568 reals C. about 1.2 reals D. about 1.5 reals E. about .5600 reals

Solution: cross rate .28/.86 = .3256

20. If the Japanese yen was worth $.0035 six months ago and is worth $.0045 today, how much has the yen appreciated or depreciated?
* A. appreciated; about 29% B. appreciated; about 25% C. depreciated; about 20% D. depreciated; about 18% E. appreciated; about 15%

Solution: use Equation (5-1) (.0045 - .0035)/.0035 = 29%

21. Assume: (1) the US annual interest rate = 10%; (2) the Malaysian annual interest rate = 4%; and (3) the 90-day forward rate for the Malaysian ringgit = $.3864. At what current spot rate will interest rate parity hold? A. $.3922 B. $.3855
* C. $.3807 D. $.3752 E. $.6000

Solution: use Equation (5-8) [(.3864 - S)/S) x (360/90)] = .10 - .04 S =…...

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