Assignment
Questions 1
Banker's Acceptances
a. Describe how foreign trade would be affected if banks did not provide trade-related services.
b. How can a banker's acceptance be beneficial to an exporter, an importer, and a bank?
Questions 2
Letters of Credit Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions.
a. Explain how an irrevocable L/C would normally facilitate the business transaction between the Russian importer and Ocean Traders of North America (the U.S. exporter).
b. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian firms.
c. Why do you think situations like this (the cancellation of the L/C) are rare in industrialized countries?
d. Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?
Questions 3
IRP Application to Short-Term Financing Connecticut Co. plans to finance its U.S. operations. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars.
a. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs short-term financing?
b. Assume that Connecticut Co. needs dollars. It borrows euros at a lower interest rate than that for dollars. If interest rate parity exists and if the forward rate of the euro is a reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
c. If Connecticut Co. expects the current spot rate to be a more reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
Questions 4
IRP Application to Short-term Financing Seabreeze Co. needs to finance some dollar-denominated expenses for one year. It can borrow euros cheaper than dollars. Interest rate parity exists. The one-year forward rate of the euro contains a premium of 4 percent. If it believes the euro will appreciate by 6 percent over the next year, would its expected financing expense be lower if it borrowed dollars or euros?
Questions 5
Effective Yield Rollins, Inc., has $3 million in cash available for 180 days. It can earn 7 percent on a U.S. Treasury bill or 9 percent on a British Treasury bill. The British investment requires conversion of dollars to British pounds. Assume that interest rate parity holds and that Rollins believes the 180-day forward rate is a reliable predictor of the spot rate to be realized 180 days from now. Would the British investment provide an effective yield that is below, above, or equal to the yield on the U.S. investment? Explain your answer.
Questions 6
Investing in a Portfolio Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability of the peso's percentage change in value during the next year is shown next:
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Possible rate of change in the mexican peso over the life of the investment
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Probability of occurrence
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-15%
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20%
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-4
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50
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0
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30
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What is the expected value of the effective yield based on this information? Given that the U.S. interest rate for one year is 7 percent, what is the probability that a one-year investment in pesos will generate a lower effective yield than could be generated if Pittsburgh Co. simply invested domestically?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.