International finance

4125 mots 17 pages
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…………………………………………………………………………………..12
Question 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, our today’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 out an 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 to

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