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Briefly Outline The Basic Contention of The Purchasing Power Parity Theory of Exchange Rate Determination

The document discusses foreign exchange risk management strategies for companies. It outlines the purchasing power parity theory of exchange rates and defines different types of foreign exchange exposures including transaction, translation, operating and economic exposures. It then provides examples of how companies can use forward contracts or money market hedges to manage foreign exchange risk when receiving or paying foreign currency amounts in the future. Calculations are shown for forward contract rates and money market hedge rates under different currency scenarios.

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Sean Austin
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54 views

Briefly Outline The Basic Contention of The Purchasing Power Parity Theory of Exchange Rate Determination

The document discusses foreign exchange risk management strategies for companies. It outlines the purchasing power parity theory of exchange rates and defines different types of foreign exchange exposures including transaction, translation, operating and economic exposures. It then provides examples of how companies can use forward contracts or money market hedges to manage foreign exchange risk when receiving or paying foreign currency amounts in the future. Calculations are shown for forward contract rates and money market hedge rates under different currency scenarios.

Uploaded by

Sean Austin
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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FM201 - Financial Institutions & Markets

Tutorial 10

Chapter 16

1. Briefly outline the basic contention of the purchasing power parity theory of exchange rate determination.

Chapter 17
2. Define FX risk, paying particular attention to transaction, translation, operating and economic
exposures. In your answer use an example to demonstrate each of the FX exposures.

3. An Australian company is exporting electronic components to Sweden. The company has a receivable
of SEK10 000 000 (Swedish Krona) due in three months’ time. The company approaches its bank and
enters into a forward exchange contract. Rates are quoted as AUD/SEK6.16-19, forward points 8–5.
Discuss the transactions that will take place today and in three months’ time. Show your calculations.

4. Explain how an Australian company could hedge its net HUF (Hungarian Forint) payables using a
BSI money-market hedging strategy. Illustrate your answer based on the company having a HUF200
million payable due in 180 days. Assume a spot rate of AUD/HUF206.90-99, a Hungarian interest
rate of 8.00 per cent per annum and an Australian interest rate of 4.50 per cent per annum.

5. Liverpool plc must make a payment of US $450,000 in 3 months’ time. The company treasurer has
determined the following:
Spot rate – $1.7000 – $1.7040
3 months forward – $1.6902 – $1.6944
6 months forward – $1.6764 – $1.6809

Money Market rates: Borrowing (p.a.) Deposit (p.a.)

US dollars 6.5% 5%

Sterling 7.5% 6%

Decide whether a forward contract hedge or a money market hedge should be undertaken.

6. Bolton is now to receive US $400,000 in 3 months’ time. The company treasurer has determined the
following:
Spot rate – $1.8250 – $1.8361
FM201 - Financial Institutions & Markets
Tutorial 10

3 months forward – 0.88¢ - 0.91¢ discount

Money Market rates: Borrowing (p.a.) Deposit (p.a.)


US dollars 5.1% 4.2%
Sterling 5.75% 4.5%

Decide whether a forward contract hedge or a money market hedge should be undertaken.

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