Question

Scenario 1:

You have to estimate the expected exchange rates one year from now between your home currency and the other currencies of the major other countries that you deal with in terms of both imports and exports. The reason is that increases in the values of other currencies compared to the U.S. Dollar may impact your imports negatively, whilst it may on the other hand, be good for exports. To do this estimate, you obtain the following spot exchange rate information:

CAD$/$	1.30779
AUD$/$	1.38140

You also obtain the following rates that you regard as similar to the annual risk free rates applying in the countries:

U.S.A.	2.660%
Canada	2.155%
Australia	1.953%

Your focus is presently to estimate the 12 month forward rates in order to consider the impact that it will have on the import and export sales of the company. Calculate the forward rates of the $ in terms of all the currencies by using simple interest rate parity e.g. 10% annual interest rate = 10/2 = 5% for six months. Do not effective annual interest rate compounding. Show all your workings in table 1 on the separate answer sheet by using the correct formula provided in your formula sheet.

Provide an indication about what will happen to the value of the US$ based on the forward exchange rate calculations by calculating the expected discount/premium of it for each of the currencies in Table 2 on the separate answer sheet. Also show whether the impact will be positive (P) or negative (N) for imports and exports. For example:

Exchange rate	% Discount/Premium	Import	Export
£/$	Workings by you ……………. = 1.93% premium	Positive	Negative

Table 1: Calculation of 12 month forward rates using the simple interest rate parity principle

Exchange rate	Forward rate 12 months from now (provide answer in this column)	Workings (show calculations in this column)
CAD$/$
AUD$/$

Table 2: Discounts/Premium of US$

Exchange rate	% Discount/Premium (Show calculations with answer)	State whether positive or negative for imports	State whether positive or negative for exports
CAD$/$
AUD$/$

Answer 1

Table 2

Exchange Rate. % Discount/Premium.  

CAD$/$. -0.49%. US $ is at a discount. Import will be profitable since outflow of US $ will be lesser. Negative for export and positive for import.

AUD$/$. -0.69%. US $ is at a discount. Import will be profitable since outflow of US$ will be lesser. Negative for export and positive for import.

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