International Financial Management PDF

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International Financial Management
Name of the Student:
Name of the University:
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INTERNATIONAL FINANCIAL MANAGEMENT1
Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................3
Answer 3:.........................................................................................................................................8
Answer 4:.......................................................................................................................................10
Answer 5:.......................................................................................................................................10
Answer 6:.......................................................................................................................................18
References:....................................................................................................................................22

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Answer 1:
Part a:
Current exchange rate
EUR USD 1.1
Increase in value of US$ by 2%
New exchange rate would be as following:
EUR USD (1.1 x 100/102) 1.0784
Thus, in case of increase in the value of US$ the new exchange rate would be EURUSD 1.0784
Part b:
The calculation of GBPEUR is provided in the table below:
EURUSD 1.1043
GBPUSD 1.2970
GBPEUR (1.297/1.1043) 1.1745
Thus, the GBPEUR rate to four decimal points would be 1.1745, i.e. EUR 1.1745 is equal to 1
GBP (Bekaert and Hodrick, 2017).
Part c:
The exchange rate of GBPEUR is calculated above on the basis of the information provided
about the exchange rate between EURUSD and GBPUSD. Since no direct exchange rate is
provide for GBPEUR thus, the value of GBP with respect to US$ has been taken into
consideration along with the value of US$ in respect to EUR. Accordingly, by comparing the
value US$ against EUR and the value US$ against GBP the exchange rate of GBREUR has been

INTERNATIONAL FINANCIAL MANAGEMENT3
calculated. This is a very popular technique used by financial experts to calculate the exchange
rate between two currencies when the direct exchange rate between the two currencies are not
available. In this case the exchange rates between US$ and GBP as well as EUR and US$ are
available. However, the exchange rate between GBP and EUR is not available thus, by
comparing the value of US$ against GBP and against EUR the exchange rate of GBPEUR has
been calculated here (Titman and Martin, 2014).
An opportunity to make profit from the arbitration of different currencies due to the fluctuation
in three different currencies called triangular arbitrage. In this case the value of US$ to EUR and
US$ to GBP can be used to earn profit from triangular arbitrage. For example by investing US$
to purchase EUR at present and then to receive GBP in exchange EUR in the future when it will
result in maximum amount of gain to the investor will be called a triangular arbitrage. Proper
understanding about exchange rate differences and ability to forecast the possible fluctuations in
different currencies provide the investors significant opportunities to make profit from arbitration
(Deresky, 2017).
Answer 2:
Part a:
According to the purchasing power parity (PPP) theory the exchange rate between two
currencies is equal to the purchasing powers of respective currencies. Thus, the exchange rate
difference is directly related to the purchasing power of respective currencies as per neoclassical
economic theory of PPP (Brooke, 2016).
The exchange rate between EURUSD in January, 2017 and in December, 2017 are provided
below in the table: