Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

exchange rates. If the quetzal does depreciate, then Farah Jeans would pay $1,050,000,
calculated in Equation 18. However, if the quetzal appreciates, subsequently, Farah Jeans would
pay out $1,312,500, computed in Equation 19.

ݐ݊ݑ݋݉ܽ($)= 8. 4 ݊݋݈݈݅݅݉ ݏ݈ܽݖݐ݁ݑݍ൭$1ൗ 8. 0 ݖݐ݁ݑݍܽݏ݈൱=$1, 050 , 000 (18)

ݐ݊ݑ݋݉ܽ($)= 8. 4 ݊݋݈݈݅݅݉ ݏ݈ܽݖݐ݁ݑݍ൭$1ൗ 6. 4 ݏ݈ܽݖݐ݁ݑݍ൱=$1, 312 , 500 (19)

Strategy 2: Farah Jeans uses a 180 - day forward contract to hedge against the exchange rate
risk, thus ensuring no exchange rate risk. Farah Jeans would pay $1,183.098.59, calculated in
Equation 20.

ݐ݊ݑ݋݉ܽ($)= 8. 4 ݊݋݈݈݅݅݉ ݏ݈ܽݖݐ݁ݑݍ൭$1ൗ 7. 1 ݏ݈ܽݖݐ݁ݑݍ൱=$1, 183 , 098. 59 (20)

Strategy 3: Farah Jeans could invest money in Guatemala today and earn interest for six
months. Then the company uses the funds to pay its accounts payable. Although this strategy
does not have an exchange rate risk, the company could experience country risk. We work
backwards and calculate the amount we need to deposit in the bank today, so it can grow into
8.4 million quetzals in six months. We calculated 7.85 million quetzals in Equation 21.

ݏ݀݊ݑ݂ ݋ݐ ݐ݅ݏ݋݌݁݀=

௙௨௧௨௥௘ ௩௔௟௨௘

ଵା௜యలబ೅

=

଼.ସ ௠௜௟௟௜௢௡ ௤௨௘௧௭௔௟௦

ଵା଴.ଵସభఴబయలబ =^7.^85 ݊݋݈݈݅݅݉^ ݏ݈ܽݖݐ݁ݑݍ^ (21)^

Then Farah Jeans transfer $1.121 million today to Guatemala using the spot exchange rate,
computed in Equation 22. Unfortunately, this good strategy has a different time horizon than the
previous two strategies. If Farah Jeans has $1.121 million in its accounts, subsequently, it could
earn interest by depositing it in a U.S. financial institution and then use Strategies 1 or 2.

ݐ݊ݑ݋݉ܽ($)= 7. 850 ݊݋݈݈݅݅݉ ݏ݈ܽݖݐ݁ݑݍ൭$1ൗ 7. 0 ݏ݈ܽݖݐ݁ݑݍ൱=$1. 121 ݊݋݈݈݅݅݉ (22)

Strategy 4: This strategy addresses the time horizon and has no exchange rate risk or
country risk. Farah Jeans invests funds in the United States today, and subsequently, uses a
forward contract to transfer money to Guatemala in six months. Farah Jeans need $1,183,098.59
in six months for the forward contract, computed in Equation 20. Then working backwards, the
company must invest $1,148,639.41 in the U.S. to earn the 6% interest for six months,
calculated in Equation 23. Consequently, Farah Jeans would earn interest in the United States