Sunshine Tea LLC
Determining Whether IFE Holds
Use an online data source to record the interest rate differential between the interest rate of the foreign country in which you plan to do business and the U.S. interest rate over the last five or so quarters. Then, review the exchange rate percentage change in the foreign currency of concern over each of those corresponding quarters to determine whether the international Fisher effect (IFE) appears to hold over those quarters for that currency.
Monitoring Exchange Rate Trends
1. Use an online source to determine how the value of the foreign currency of concern has changed in each of the last five weeks. Does it appear that there is a trend over the last five weeks? If you believed that the currency’s value would continue following the recent trend, would it appreciate or depreciate in the near future?
Recognizing Exposure to Exchange Rate Risk
Recall that when you created your business idea, it was assumed that your receivables would be denominated in the foreign currency of concern upon the sale of your products.
Describe your exposure to exchange rate risk. That is, describe the exchange rate conditions affecting the performance of your business.
Is your business subject to transaction exposure? Economic exposure? Translation exposure? Explain why your business is or is not subject to each of these types of exposure.
Hedging with Forward Contracts
Given your exposure to exchange rate risk, explain how you could use forward contracts to hedge.
Explain how you could use currency options to hedge your exposure.
Review the currency options quotations for the foreign currency of concern from an online source, and determine the premium that would be paid to be able to sell the currency at today’s spot rate. (If the currency option data are not available for the currency of concern, skip this question.)
Denominating Receivables in U.S. Dollars
1. Recall that it was assumed that your receivables would be denominated in the foreign currency of concern. For this question only, assume that you could switch your pricing policy so that the receivables would be denominated in dollars instead of the foreign currency.
How would this switch affect the transaction exposure and the economic exposure of your business? Explain the conditions that could still cause the performance of your business to be affected by exchange rate movements.
