GEE Group 7

Question 1

Question 3

Question 2

b. Takeaways about forward market

b. Could losses be prevented?

a. Alternative options rather than forward contracts

b. Why Abe's policy helped drive down the yen value and what was the mechanism?

a. What drove an increase of yen value?

a. 3 important types of exposure to currency exchange rate fluctuations:

b.i. how the current exchange rate between ¥ and $ will get adjusted according to Law of One Price?

b.i. What will be the adjusted exchange rate between currencies?

b. Agree with decision to stop using forwards?

c. Who benefits for devaluation of the yen?

c. Who suffers from devaluation of the yen?

  1. Transaction Exposure
  1. Translation Exposure
  1. Economic Exposure

Embraer Case (Question 1)

In 2015 Apple reported a record revenues of $15.4 billion, however in absence of foreign exchange volatility it would be 4% higher according to Apple's CFO

Stanley Black & Decker

b.ii. What would the Fisher effect imply about the
expected difference in inflation rates ?

b.ii. Expected effect on the exchange rate between and ¥ and $

Price its aircraft in real(assume transaction between US and Brazil; feasible? )

Use lead and lag strategies

Pay suppliers later (if real appreciates, you'll pay less)

Collect payments from customer earlier (receive $ later and convert to real)

Currency hedging is beneficial if a firm's currency appreciates in value. In Embraer's case, the real depreciates however the contract locked the firm into a much high real to usd exchange rate.

Fluctuations in the foreign exchange market greatly impacts profitability of issurances.

It not only provide insurance, but also imposes new risks

Don't agree, it's not forward's fault, they are just a tool, that should be used properly

Agree, forwards provide insurance against appreciation, however limit firm's profits potential from depreciation. when a market is so volatile as Brazilian it might not be worthy

Unless a firm has valid reason to believe that their currency will greatly appreciate between the contract period, a forward may not work in their favor, as with Embraer's case

Financial institutions sold dollar-denominated assets and bought yen-->Demand in yen increased-->yen value increased

Financial crisis in the US --> Lower interest rates in the US --> Carry trade is profitable no more --> Less Supply of Yen --> Appreciation of Yen

Abe's government - promised to depreciate and did it

Exporters in Japan (like Toyota)

Long-term thinkers, who afraid from reaction of other countries

Japan's importers

Central Bank of Japan purchases government securities --> More liquidity in the market (more Yens) --> Supply of Yen increases faster than increase in output --> inflation (money supply and price inflation)--> Yen depreciation (according to PPP Theory)

Result: D$ increases --> $ appreciates; S¥ increases --> ¥ depreciates --> exchange rate adjusted

People will do this: In NP convert ¥32 : to $8; Buy in SP stick for $8 --> arbitrage $2 or ¥8

40/Pusd = 8 --> Pusd = 40/8 = 5 Yen --> exchange rate will be 5 Yen for 1 USD

Deposit revenue in US bank in US dollor

Factoring(transfer the risks to factor)

Agreement On Exchange Guarantees(both sides agree to adjust sum of money in proportion in the process )

Backwards thinking, of course, how ever it was their business decision that failed because of unpredictable circumstances

in=rn+In......
is=rs+Is......*
in-is=4%
rn=rs-->In-Is=4%

PPP theory: ¥ depreciates by 4%

Common citizens of Japan because they suffer from the higher price level

Disperse production to different location