Finance 475

Problem Set #8

1) Suppose that you have the following regression of the EUR/UDS exchange rate (standard errors in parentheses)

Dependant Variable: Monthly % Change in the Exchange Rate (\$/Euro)

Intercept: -.05 (.006)

US interest rate – Euro interest rate: 1.5 (.57)

European Economic Growth – US Economic Growth: .65 (.2)

The standard error of the regression is 1.75. Currently, the interest rate differential is 2% and the difference in economic growth is 1%.

a) Calculate a point estimate for the percentage change in the exchange rate.

b) Calculate a 95% confidence interval for the exchange rate.

2)      Suppose that you are importing BMWs from Germany .  You have agreed to buy 200 cars at a price of E 40,000 apiece.  Payment is due on delivery one month from now. Given your answer to (a), within what range will your costs lie?

3)      Suppose that GM is exporting cars to both Great Britain and Switzerland.

Swiss Exports: CHF 300,000

British Exports: GBP 200,000

Currently, the British Pound is trading at \$1.85 while the Swiss Franc is trading at \$.84. We also have the following information:

GBP:  Forecasted to depreciate by 2% with a standard deviation of 1.5%.

CHF: Forecasted to depreciate by 1% with a standard deviation of 2%.

Historically, the Changes in the British Pound have a correlation of .25 with changes in the Swiss Franc.

a) Calculate the distribution of GM revenues in one month.

b) Would GM be better off concentrating its sales in Britain ?

4)      Microsoft is contemplating a change in its overseas pricing policy.  Currently it is pricing its international sales in foreign currency.  The price elasticity for Microsoft products is estimated to be .5.  Would Microsoft be better off pricing in foreign currency? Explain.

5) How can a company with no foreign transactions still find itself exposed to currency risk?