+1 862 207 3288 Module 4 Written; Finance and Accounting
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Question 1
The following information is available:
You have $500,000 to invest
The current spot rate of the Moroccan dirham is $.110.
The 60-day forward rate of the Moroccan dirham is $.108.
The 60-day interest rate in the U.S. is 1 percent.
The 60-day interest rate in Morocco is 2 percent.
a. What is the yield to a U.S. investor who conducts covered interest arbitrage? Did covered interest arbitrage work for the investor in this case?
b. Would covered interest arbitrage be possible for a Moroccan investor in this case?
Question 2
Currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this
chapter explains this occurrence? Why dont all U.S.-based MNCs use forward contracts to hedge their future remittances of funds from Latin American
countries to the U.S. even if they expect depreciation of the currencies against the dollar?
Question 3
The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar.
The values of Latin American currencies have generally declined substantially against the dollar over time. Most of these countries have high
inflation rates and high interest rates. The data on inflation rates, economic growth, and other economic indicators are subject to error, as limited
resources are used to compile the data.
a. If the forward rate is used as a market-based forecast, will this rate result in a forecast of appreciation, depreciation, or no change in any
particular Latin American currency? Explain.
b. If technical forecasting is used, will this result in a forecast of appreciation, depreciation, or no change in the value of a specific Latin
American currency? Explain.
c. Do you think that U.S. firms can accurately forecast the future values of Latin American currencies? Explain.
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