Foreign Exchange Rate
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1.a. By using the forward foreign exchange market, Jaguar can reduce its foreign exchange rate risk through the use of arbitrage and hedging. Arbitrage and hedging situations occur with regularity among the several foreign exchange markets. Between any two national currencies, there is an exchange rate. In a system where individuals may trade foreign currencies, arbitrage insures that a sequence of transactions starting in one currency and continuing on through several other currencies will result in the same quantity of the starting currency less transactions costs. As an example, trading Canadian dollars for French francs, French francs for Japanese yen, and Japanese yen for Canadian States dollars results in a final quantity of Canadian dollars equal to the initial quantity of Canadian dollars less the transactions costs, as a result of arbitrage. Arbitrage is used by the financial officers of multinational business organizations, such as Jaguar, for the purpose of reducing risk.In the context of the multinational business organization, potential foreign exchange losses depend on a company's exposure on its vulnerability to foreign exchange loss. In a general sense, there are two main types of such exposure commercial exposure and translation exposure. Commercial exposure arises when a company has an obligation to make or to receive payment in a foreign currency, such as the payment for imported goods or the collection for exported products. In the case of i
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is 7 7/16 percent.
1.c. The three month forward rate for the French franc/British pound is the spot rate less the annualized premiums and discounts in the forward foreign exchange market. The annualized premiums and discounts in the forward exchange market are equal to the interest differential between the two currencies involved. The given interest rate for the British pound is 9 5/16 percent, while the given interest rate for the French franc is 7 7/16 percent. Thus, the interest differential is 1 7/8 percent. As the French franc has the lower interest rate, that currency will trade at a premium against the British pound in the forward exchange market, while the British pound will trade at a discount against the French franc. The given spot rate for the French franc/British pound is 9.50, which means that 9.5 French francs are required to buy one British pound on the spot market. In the three month forward exchange market, however, the British pound will trade at a 1.875 discount. Thus, the French franc/British pound three month forward rate would be 7.625, or 7 5/8.
1.d. Although many theoretical models have been developed to forecast foreign exchange rate changes, three theoretical models have demonstrated stayin
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Some common words found in the essay are:
, foreign exchange, exchange rate, current account, exchange rates, currency exchange, multinational business, british pound, exchange market, multinational business organization, asset holding preferences, current account balance, holding preferences, currency exchange rates, rate changes, exchange rate changes,
Approximate Word count = 1442
Approximate Pages = 6 (250 words per page)
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