Question

Assessment 10

For this assessment, complete Problems 1–2, applying the necessary knowledge to strategically manage global financial issues. You may need an HP 10B II Business Calculator to complete the following problems. You may use Word or Excel to complete the assessments throughout this course, but you will find Excel to be most helpful for creating spreadsheets.

Problem 1: Currency Appreciation

Suppose that 1 Euro could be purchased in the foreign exchange market today for $0.25. If the Euro appreciated 10 percent tomorrow against the dollar, how many Euros would a dollar buy tomorrow?

Problem 2: Cross Rates

Assume the exchange rate between US dollar and Indian Rupee is 60 Rupees = $1, and the exchange rate between dollar and British pound is 1 Pound = $1.5. What is the exchange rate between the Rupee and pound?

Answer 1

(1) Current Exchange Rate: 1 EUR = $ 0.25 or 4 EUR = $ 1 (This implies that today 1 $ can purchase 4 Euros)

If the Euro appreciated by 10%tomorrow, it means that the same amount of dollar can purchase 10% fewer euros tomorrow as compared to today. Today 1 $ can purchase 4 Euros. Post a 10% appreciation 1 $ can purchase 4 x 0.9= 3.6 Euros.

Therefore, tomorrow 1 $ can purchase 3.6 Euros or tomorrow's exchange rate would be 1 $ = 3.6 EUR

(2) 1 $ = 60 Rupees and 1 pound = $ 1.5

Now, 1 Pound = 1.5 $ or 1 $ = 1 / 1.5 Pound

1 $ = 0.667 Pound

Also 1 $ = 60 Rupees

Therefore, 0.667 Pound = 60 Rupees

1 Pound = 60 Rupees / 0.667 = 90 Rupees

Therefore, 1 Pound = 90 Rupees