1.         If the interest rate in the US is 5.5% and in France it is 4.5%, the spot franc is $.182, and the real interest rate in both countries is 3%, answer the following questions         assuming perfect and efficient markets.

            a. What would you expect the one-year forward rate to be for the franc?  What theory suggests this conclusion?
b.What would you expect the spot rate to be for the franc in one year?  What theories suggest this conclusion?

2.         Given the following information:

                        U. S. 180-day interest rate = 5.0% per annum
                        German 180-day interest rate = 4.0% per annum
                        Spot rate for the mark = $.685
                        180-day forward rate for the mark = $.69

            Is the spot and forward market in equilibrium?  If not, what market forces could bring about equilibrium?

 3.         Distinguish between technical and fundamental forecasting methods.

4.         If efficient market theory is correct, what value if any is exchange rate forecasting for the MNC?  Would knowledge of past exchange rate volatility and correlation among currencies be useful?

5.         Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure?

6.         If interest rates go up in Germany relative to the U.S., what should happen to the value of the mark?  Explain.

7.            Compare and contrast transaction exposure with economic exposure.

8.         Assume that Vermin Company has a net receivables position of 5,000,000Mexican pesos in 180 days.  The Mexican interest rate is 8% (annualized), and the spot rate is $.10.  Show how the U.S. firm could implement a money market hedge.  Be precise.

9.         Explain how a U.S. corporation could hedge a net payables position in Japanese yen with forward contracts.  Be clear in your answer.