Foreign Exchange and Money Markets - Theory, Practice, and Risk Management - Assignment Example

Problem-solving Name: Institution: Question 1 Calculations for the above calculations are as follows; Purchase price, converted to Jordanian dinar (JD) = €375,000 * 0.8700 (JD/€) = 326,250.00 JD Additional fees due to importation= 326,250.00 * 0.12 = 39,150.00 Total cost, Jordanian dinar (JD) = 326,250 +39,150.00 = 365,400.00 Resale fee in Jordanian= 365,400.00 * 0.22= 80,388.00 Resale price to Saudi Arabian, in JD = 365,400.00 + 80,388.00 = 445,788.00 Price paid in Iraq dinar, converting JD to SRI = 445,788.00 * 5.2966 = 2,361,165.25 The US dollar equivalent of the price paid = 2,361,165.25/0.7080 = $629,644.07 Question 2 A person pays a$240,000 for a new four-bedroom 2400-square-foot home. He plans to make a 20% down payment, but is having trouble deciding whether he wants a 15-year-fixed-rate mortgage (6.400%) or a 30-year fixed rate (6.875%). a) What is the monthly payment, assuming a fully amortizing loan of equal payments for the life of the mortgage? The principal = $240,000 *0.80 = $192,000 The monthly payment is calculated using the following formula; Monthly payment = (mortgage amount* r/12)/1-(1/ (1+r/12) ^T*12 Where; The mortgage amount= $192,000 The monthly mortgage financing rate=0.0 6875/12 The mortgage term in years = 30 years Mortgage term in months = 12*30 = 360 Using the PMT in the excel spreadsheet, the monthly payment = $1261.30 or -$1261.30 = PMT (0.06875/12, 360, 192000, 0, 0). It should be noted that the monthly payments for fixed rate mortgages are very sensitive to the interest rates and the number of years in the loan. Thus, a mortgage of $192000 would require a monthly payment of $1261.30. b) Assume that instead of making a 20% down payment, he makes a 10% down payment, and finances the remainder at 7.125% fixed interest for 15 years. What is his monthly payment? The principal amount would be calculated as follows; Principal = $240,000*0.90 = $216000, monthly mortgage financing rate= 0.07125/12, mortgage term in years = 12 years, mortgage term in months = 12*15 = 180. Using the amortizing formula above or the PMT in an excel sheet, the following monthly payment is obtained; -$1956.60= PMT (0.0059375, 180, 216000, 0, 0) Thus the monthly payment will be $1956.60. c) Assume that the home's total value falls by 25%. If the homeowner was able to now sell the house, but at the new home value, what would be his gain or loss on the home and mortgage assuming all of the mortgage principal remains? Use the same assumptions as under part a. If the total value of the house falls by 25%, then the new principal value will be; $240,000 *0.75 = $180,000. The total interest paid at $192,000= $262,069.20. The total interest paid at $180,000= $245,689.87. Upon selling the house, the owner will incur a loss of $16,379.33. Question 3 Assume that the export price of a Nissan XTerra from Osaka, Japan is ¥2,800,000. The exchange rate is ¥110.20/US$. The forecast rate of inflation in the United States is 2.0% per year and is 0.0% per year in Japan. The above calculations have been computed using as shown below; The proportion percentage change (%) = (70*2.2)/ 100 = 1.540 Effective exchange rate used by Nissan to price in US for the end year = 115.20 – ((2.2+1.54)/2)) The year beginning price of a Xterra ($) = 3250, 000/115.20 = $28,211.81 The expected exchange rate at the end of the year assuming PPP (¥/$) = 115.20- 2.2= 112.72 Price of Xterra at the end of one year in ($) = 3250, 000/112.72= $28,832.50 Price of Xterra at the end of one year in ($) = 3250, 000/113.33= $24,375.58 Question 4 Money and foreign exchange markets in Frankfurt and Sydney are very efficient. Using the following market information, answer the following questions: Frankfurt Sydney Spot rate $1.2000/Euro $1.2000/Euro One-year treasury bill 6.500% 3.200% Expected inflation Unknown 2.000% a) What do the financial markets suggest for inflation in Europe next year? If we consider Fisher-open, then the real interest rates should be the same between the above two markets because the markets are highly efficient, which, thus means that there is no arbitrate opportunities left (Steiner & Securities Institute, 2002). The question is what are the real interest rates? From Fisher’s effect we know that; (1 +nominal interest rate)= (1 +expected inflation)*(1+ real interest rate) or it can be simply put as follows; Nominal interest rate = real interest rate + inflation. Using the above market information, the above equality holds for both Sydney and Frankfurt alike. Europe: 1+ 6.5%= (1+unknown)*(1+realinterest rate) US: 1+3.2%= (1+2%)*(1+real interest rate) Therefore, finding out the interest rate from US; Real interest rate= ((1+0.032)/ (1+0.02))-1= 0.0117 or 1.17% Now, given that the real interest rate for the two countries is the same, we can apply the real interest rate form US to Europe as follows; 1+6.5%= (1+ unknown)*(1+1.17%), from where the expected inflation is determined as; Expected inflation in Europe= ((1+0.065) / (1+0.0117))-1 = 5.27% or 0.0527. b) Estimate today’s one-year forward exchange rate between the dollar and the euro. The forward rate is given by the following equation; F360$/Euro= SUSD/EURO * ((1+i$)/ (1+iEURO)) = 1.200 *((1+0.032)/ (1+0.065)) = $1.1628/EURO Question 5 a. Suppose the Malaysia ringgit devalues by 75% against the dollar. What is the percentage appreciation of the dollar against the Malaysia ringgit? When the currency of a country devalues of depreciates, it implies to the loss of that country’s currency with respect to the other country’s currency. On the other hand, an increase in the value of a currency is referred to as currency appreciation (Steiner & Securities Institute, 2002). The devaluation of a country’s currency, therefore, refers to the decrease in the value of that nation’s money or currency. When the Malaysia ringgit devalues against the dollar, the exchange rate (the Malaysia ringgit price of dollars) rises: it then means that it takes more of the Malaysian ringgit to purchase 1 dollar. Therefore, Suppose the Malaysia ringgit devalues by 75% against the dollar. The percentage appreciation of the dollar against the Malaysia would be; 75%/100%= 0.75 % appreciation of dollar = (1-0.75)/0.75= 0.3333% against the Malaysia ringgit b. Suppose the dollar appreciates by 500% against the Colombia peso. How much has the peso devalued against the dollar?  500%/100%= 5 % depreciation = (5-1)/1= 4 % depreciation Question 6 Between 2004 and 2007, the price of a room at the Thailand Sky hotel rose from baht (B) 3,200 to B 4,500. At the same time, the exchange rate went from B 1,302=$1 in 2004 to B 1,075 = $1 in 2007. By how much has the dollar cost of a room at the Thailand Sky hotel changed over this three-year period? Solution The 2004 spot rate exchange; (B) 1,302=$1, which implies that (B/$) = 0.000768 Cost of the room in dollars= 3,200*0.000768 = $2.4576 The 2007 spot rate exchange; (B) 1075=$1, which also implies that (B/$) = 0.00093 Cost of the room in dollars = $4.185 By how much has the dollar cost of a room at the Thailand Sky hotel changed over this three-year period? Percentage change = ((4.185-2.4576)/2.4576))*100% = 70.29% References Steiner, B., & Securities Institute. (2002). Foreign exchange and money markets: Theory, practice and risk management. 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