International finance

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Name: Florian NICOLAS

Course: International Finance

Professor: David POLLON

Class: SUP5 1B

Date of Course: Mar 19 – Mar 20 2010

Due date of Assignment Submission: 20 March 2010

Email: florian.nicolas2@hotmail.fr

Table of content

Question 1…………………………………………………………………………………...3
Question 2 …………………………………………………………………………………..8
Question 3…………………………………………………………………………………..12Question 4…………………………………………………………………………………..15
REFERENCES……………………………………………………………………………….18

1) Spot Rates

Using today’s spot rate and the spot rate expected in one year from the attached list, answer the following questions.

a) Explain which currency is expected to appreciate and by what annual percentage.

We have a today’s spot rate of $1.30/€ and the expected spot rate in one year is$1.20/€.
In our case, we will need fewer US dollars to get 1€ that is that the Us dollars is expected to appreciate and that its value compared to the euro will be higher in one year. To find by what annual percentage the Us Dollars is expecting to appreciate we have to convert the exchange rates from dollars to euro in order to know the amount of Euros to obtain one dollar.
As we said before, ourtoday’s spot rate is $1.30/€.
1/1.30 = 0.769€
= €0.769/$
And the expected spot rate in one year is $1.20/€.
1/1.20 = €0.833/$
To find by what annual percentage the dollar is expected to appreciate we apply the following formula:
[End Value (expected spot rate) – beginning value (today’s spot rate) / Beginning value] x 100
0.833 - 0.769
0.769
= 0.08322 = 8. 322%
Thus, we found outan annual percentage of 8. 322%. It means that the dollar is expected to appreciate by 8. 322%.

b) According to Purchasing Power Parity, which country should have higher inflation and explain why.

According to Purchasing Power Parity, the more inflation there is in a country, the more its currency will depreciate. If we refer to our situation, we want the Euro to go down in order toobtain parity. Let’s take an example to illustrate it. We consider that our exchange rate is $1/€ while the US inflation is 3%. If the Euro inflation is 0% we can say that the $ is depreciated by 3%. Thus, our exchange rate will be of $1.03/€.
However, in our case, we established that the $ is expected to appreciate. In consequence, if we want to have a Purchasing Power Parity, the Europeshould have higher inflation than the US in one year.

c) Assume an American exporter sells computer printers for $130 each, while a French competitor sells each printer for €100. Calculate the US$ price of the French printer and the € price of the American printer at the beginning of the year. Recalculate these prices at the end of year. Which competitor has benefited?

Our data:
Weknow that:
- The American exporter sells computer printers for $130 each
- French competitor sells each printer for €100.
- We keep the same exchange rates as for the first question.

Thanks to these data, let’s calculate the US$ price of the French printer and the € price of the American printer at the beginning and at the end of the year for both US and French exporters.

For USprinter:

|Beginning of the year |End of the year |
|$ Price = $130 |$ Price = $130 |
|€ Price = |€ Price =|
|$130 |$130 |
|$1.30/€ |$1.20/€ |
|€ price = €100 |€ price = €108.33...
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