Problem: Exchange rates for several currencies are shown below. They are shown as direct or indirect from the standpoint of a U.S. company.
U.S. Dollar/Yen U.S. Dollar/ Peso Euro/U.S. Dollar
(indirect) (indirect) (direct)
Spot 105 11.50 1.30
30-day forward 104 11.60 1.31
90-day forward 103 11.65 1.35
180-day forward 101 11.80 1.36
a. Is the U. S. dollar appreciating or depreciating against the yen? Explain.
b. Is the U.S. dollar appreciating or depreciating against the peso? Explain.
c. Is the U. S. dollar appreciating or depreciating against the euro. Explain.
d. A U.S. company purchases from suppliers in Japan, Mexico, and the Netherlands and pays in the suppliers' currency. For each of the suppliers, will the U.S. company pay more or less in 30 days than now, assuming the 30-day forward rate becomes the spot rate at the end of 30 days.
e. Who bears the currency risk--the U.S. company or the foreign supplier? Why?