finance

QUESTION 1

“International Parity Relationships and Forecasting Foreign Exchange Rates” Please respond to the following:

· From the

e-Activity

, discuss the implications of the deviations from purchasing power parity for countries’ competitive positions in the world market.

· Researchers found that it is very difficult to forecast future exchange rates more accurately than the forward exchange rate or the current spot exchange rate. Examine the underlying factors behind these findings and make at least two (2) recommendations for improving the forecast of future exchange rates.

E-ACTIVITIES FOR QUESTION 1

e-Activity

·  Use the Internet to research recent causes for fluctuations in purchasing power parity. Be prepared to discuss.

QUESTION 1B

“Futures and Options on Foreign Exchange” Please respond to the following:

· Compare and contrast the basic differences between the operation of a currency forward market and a futures market.

· Discuss how the FX call and put option model pricing can change with respect to European option-pricing relationships.

QUESTION 2

“Management of Transaction Exposure” Please respond to the following:

· Discuss and compare hedging transaction exposure using the forward contract versus money market instruments. 

· From the first e-Activity, determine the best way to leverage a currency options contract as a hedging tool compared with a forward contract. Provide specific examples to support your response.

QUESTION 2B

“Management of Economic Exposure” Please respond to the following:

· General Motors exports cars to Spain, but the strong dollar against the euro hurts sales of GM cars in Spain. In the Spanish market, GM faces competition from Italian and French car makers, such as Fiat and Renault, whose operating currencies are the euro.  From the second e-Activity, determine the best course for GM to take to maintain its market share in Spain. Explain your rationale.

· Discuss the advantages and disadvantages of maintaining multiple manufacturing sites as a hedge against exchange rate exposure.

NOTE: E-ACTIVITIES FOR QUESTION 2A AND B BELOW

e-Activities

· Use the Internet and / or the Strayer online library to research best practices for using currency contracts and forward contracts as hedging tools. Be prepared to discuss.

· Use the Internet to research General Motor’s strategy for growing its market share in Spain. Be prepared to discuss.