The Economist invented the Big Mac

Index which compares the cost of producing a hamburger across different

countries. The implied PPP exchange rate based on the Big Mac Index is Mexican

Pesos 8.50 per dollar. However, the current exchange rate between the U.S and

Mexico is given as Mexican Peso 10.80 per dollar. What does this suggest about

the value of the Pesos according to the law of one price and PPP?

Assume that a firm has a floating

rate debt and a low credit rate. How can it use a swap rate agreement with a

counterparty to achieve a fixed rate payment?

A dealer buys EUR5,000,000 forward

for Euro for delivery in, two months at EUR0.5556/USD and simultaneously

sells $EUR,000,000 forward for delivery in three months at

EUR0.5545/USD. This foreign exchange transaction is equivalent to

________ states that differential

rates of inflation between two countries tend to be offset over time by an

equal but opposite change in the spot exchange rate.

DailyLife Inc. a U.S.-based firm,

produces and sells health supplements both domestically and internationally. A

sudden and unexpected depreciation of the U.S. dollar should allow DailyLife

sales to ________ at home and ________ abroad. (Assume other factors remain

unchanged.)

From a general risk-management

point of view, internationally diversified portfolios are the same in principle

as a domestic portfolio because:

Regency Inc. has a floating rate

interest payment obligation in nine months from now. It wants to lock in this

interest payment by entering into an interest rate futures contract. Interest

rate futures for 9-months from now settled at 96.95. What is the effective

yield on the available futures? What position should Regency take to lock in

it's borrowing rate? 

The OLI paradigm provides a

framework through which an MNE would choose ________ rather than some other

form of international venture.

Allen, CFO of a microchip

manufacturer company Nemco, Inc., was approached by a Japanese customer with a

proposal to pay cash (in yen) for its typical orders of ¥25,500,000 every other

month if it were given a 5% discount. The current terms are delayed payment

after 30 days with no discounts. Using the following quotes and estimated cost

of capital for the Japanese customer, Jason will compare the proposal with

covering yen payments with forward contracts. Spot rate : ¥112.5/$30-day

forward rate : ¥111.5/$, Nemco WACC : 9.2% p.a. How much in U.S. dollars will

Nemco, Inc receive with the discount and with no discount but fully covered

with a forward contract? Should he accept the offer made by the Japanese

customer? (use 360 days convention)

Under an international regime of

fixed exchange rates, countries with a BOP ________ should consider ________

their currency while countries with a BOP ________ should consider ________

their currency.