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as applied to the FX markets, imply that
movements in exchanges rates are inherently very hard to predict
accurately?
Hint: See Note Set 9 on the Random Walk model. 7. A US company
must make a payment of 100M AUDs in 90 days for goods bought. It
is
concerned that the AUD will appreciate relative to the USD and is
looking for possible
protection against this outcome. Using the information in Exhibit 1 set
up a MMH that will
protect the company from loss due to an unexpected appreciation in
the AUD.
Exhibit 1
The current spot rate is1.000 USD per AUD.
The current 90-day loan rate for AUDs is 5% and for USDs is 1%.
Interest rates are quoted on
an annualized basis.
Hint: See Note Set 7 on the Money Market Hedge. 8. Using the
LIBOR data in Exhibit 1 calculate the forward exchange rates for the
Brazilian Real
(BRL) and the South African Rand (ZAR) relative to the USD in units
of foreign currency per
USD. Insert these numbers in the appropriate boxes in Exhibit 2
below.
A couple of entries are given. Hint: See Note Set 6 for implied
forward rates. 9. Explain why both international capital flows and
international trade flows sum to zero at the
planetary level.
Hint: See Note Set 8 on capital and trade flows between developed
and undeveloped economies. 10. Show and explain why every
country’s BOP equals zero (ignoring errors and omissions in
the data).