Question

Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It keeps funds for transaction purposes in many foreign currencies. Assume that in 20XX it held 100,000 reals in Brazil worth $42,000. It earned 12 percent interest, but the real declined 20 percent against the dollar.

a. What is the value of its holdings, based on Canadian dollars, at year-end? (Do not round intermediate calculations.)

Value of the holdings           $

b. What is the value of its holdings, based on Canadian dollars, at year-end if it earned 9 percent and the real went up by 10 percent against the dollar? (Do not round intermediate calculations.)

Value of the holdings           $

Answer 1

Question a

Exchange rate now=Canadian value/real value=$42000/100000 real= $/real 0.42

Exchange rate after real decling 20%=exchange rate now*(1-decline in exchange rate)

=0.42*(1-0.2)=0.42*.8=$/real 0.336

Value in real=value*(1+interest rate)=100000*(1.12)=112000

Value in canadian $=value in real*exchange rate=112000*0.336=$37632.

Question b

Exchange rate now=Canadian value/real value=$42000/100000 real= $/real 0.42

Exchange rate after real increasing 10%=exchange rate now*(1+increase in exchange rate)

=0.42*(1+0.1)=0.42*1.1=$/real 0.462

Value in real=value*(1+interest rate)=100000*(1.09)=109000

Value in canadian $=value in real*exchange rate=109000*0.462=$50358.