What is your expected spot rate of the swiss franc

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Reference no: EM132028162

Question: Part 1) New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $.65. The annualized U.S. interest rate is 4 percent regardless of the debt maturity. The annualized Australian dollar interest rate is 12 percent regardless of the debt maturity. New York plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists.

Determine the amount of U.S. dollars that New York Co. will need in 2 years to make its payment.

Part 2)

You believe in purchasing power parity. In your analysis, you assume locational arbitrage guarantees spot exchange rates are properly aligned. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is 0.3 pounds. Your inflation expectations are 7 percent in the United Kingdom, 5 percent in Switzerland, and 2 percent in the United States. One-year interest rates are 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States.

What is your expected spot rate of the Swiss franc in one year with respect to the United States dollar?

Reference no: EM132028162

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