TOWSON UNIVERSITYCOLLEGE OF BUSINESS AND ECONOMICSFIN435.001Dr. M. RheeFall 20091. a) How many $ can you get for 20 SFs if $/SF=0.8? => SF 20 * 0.8 ($/SF) = $16b) If the value of SF decreases 30%, then how much $ is up against SF? => Let’s say So = 1 ($/SF), then 30% drop in the value of SF => S1 = 0.70 (70 cents for one SF)$ appreciation rate against SF = (So – S1)/S1 = (1-0.7)/0.7 = 0.3/0.7 = 42.86%c) Yen/$ was 133.59 in Feb 2000, depreciated about 18.06% for the next two years. What was the yen/$ ratein Feb 2002? => So = 1/133.59 = 0.007486. Yen appreciation rate against $ = (S1 – 0.007486)/0.007486 = -0.1806. S1 = 0.006134 or yen/$ rate in Feb 2002 = 1/0.006134 = 163.03.d) If yen/$ = 108.2, yen/BP = 197.45, what is the BP/$ rate? => BP/$ = (BP/yen)*(yen/$) = (1/197.45)*(108.2) = 0.548Alternatively, you can use BP/yen = (BP/$)*($/yen) relationship. That is 1/197.45 = (BP/$)*(1/108.2) and solve the equation for BP/$.2. You have just sold a share of XX French firm, for e50. The exchange rate is $ 1.25/e now and it was $1.15/e a year ago. You did receive 2 euro dividend for each share while holding this stock. Compute the euro price of the stock a year ago if the $ rate of return from this investment is 30%?=> From the sale of one share of the company stock, you have 50 euro. At the current exchange rate of $1.25/e, you can get 50*1.25=$62.50. You also have received 2 euro dividend for each share, which is equal to 2*1.25=$2.50. Altogether, you have just received $65.00 from investing in just one share. 30% dollar rate of return implies that = ($Ending Balance - $Beginning Balance)/$ Beginning Balance = (65 – Beg)/Beg = 0.30 => $Beg Balance = $65/1.3 = $50. In other words, you have started with $50 to begin with. Since the exchange rate at that time was $1.15/e, the euro price of the stock share is e50*(1/1.15) = e 43.48 Alternatively, you can use euro appreciation rate (against $) and the foreign currency (euro) rate of return on this stock. Euro currency appreciation (against $) = (S1 – So)/So = (1.25 – 1.15)/1.15 = 0.087 or 8.7% appreciation. Euro rate of return on this stock = (50 – Po + 2)/Po. The 1 + $ rate of return is a combination of these two returns or 1 + R$ = (1 + euro appreciation rate)*(1 + euro rate of return on this stock) => 1.3 =(1.087)*(1 + euro rate of return on this stock) => euro rate of return on this stock = 1.3/1.087 -1 = 0.196 or 19.6%. Now, the euro rate of return on this stock = (50 – Po + 2)/Po = 0.196 => Po = 52/1.196= e43.383. Differentiate between:a) Linear vs. log scales => Absolute change (or $ change) vs. % change b) Standard deviation vs. coefficient of variation => Absolute measure of volatility, relative measure of volatility & level free. Example: standard deviation tends to large for a variable with a greater magnitude, while coefficient of variation is looking at a % change. A fat person tends to have a greater change in the weight (gaining or losing 5 pounds is a everyday event) than a thin person. To be fair, we need to make it a level free. That is what percentage of weight (instead of how many pounds) each person gain or lose a day.c) Portfolio investment vs. foreign direct investment=> Portfolio investment is seeking a higher return and a greater reduction in risk through a portfolio diversification. FDI is trying to secure a controlling interest of the business and run the business.d) Classical gold standard vs. gold exchange system=> All currencies are fully convertible into gold in case of classical gold standard. In case of gold exchange, only us$ is fully convertible into gold and other currencies values are pegged (fixed) relative to the US$.4. Explain how changes in the following macroeconomic variables affect exchange rates. Use diagrams.1) Higher UK inflation rate & Higher US interest rate.Higher UK inflation=> Demand for less expensive US products increases=> Demand for US$ increase=supply of BP increases=> ($) price of BP=exchange rate drops, strong $ & weak BPHigher US interest rates=> Demand for US$ increases to invest in the US for higher returns= supply of BPs=> The rest is the same as Higher UK inflationConclusion: Exchange rate drops, stronger $ & weaker BP2) Higher UK interest rates & Stronger US economyHigher UK interest rates=> Demand for BP increases to invest more in UK=> ($) price of BP=exchange rate increases, stronger BP & weaker $Stronger US economy1) Consumption side=> Greater demand for UK (as well as US) products=> Demand for BP increases=> ($) price of BP=exchange rate increases, stronger BP & weaker $2)Investment side=> Increased investment in the stronger US economy=> Demand for US$ increase=supply of BP increases=> ($) price of BP=exchange rate drops, strong $ & weak BPBetween 1) Consumption side and 2) Investment side, Investment side tends to be a dominant force=> ($) price of BP=exchange rate drops, strong $ & weak BP (Stronger economy has a stronger currency)Conclusion: Since these two factors affect the exchange rate in different directions, we cannot concludehow the exchange rate would change as we have Higher UK interest rates & Stronger US economy.5. A MNC has the following cash flows from their operations around the world. What is the $ amount of total cash flows from all the operations?US operation: $100m, Canadian operation: C$150m, Japanese operation: 12billion yen, UK operation: 70mpoundsCAD/USD=1.2783, GBP/USD=0.8702, JPY/USD=112.3968If C$ and Japanese yen have depreciated 10% against the US$, what would be the new $ amount? => $ amount of total cash flows = $100m + C$150m*(1/1.2783) + BP70m*(1/0.8702) + yen 12,000m*(1/112.3968) = US$404.55m=> $100m + C$150m*(1/1.2783)*0.9 + BP70m*(1/0.8702) + yen 12,000m*(1/112.3968)*0.9 =