Economics Homework Help

Part 1

ACME recognizes that exchange rates for the countries in which they are considering acquiring a company can make a big difference in both acquiring the company and managing the resources. There are three distinct approaches to exchange rate forecasting: (a) the efficient market approach, (b) the fundamental approach, and (c) the technical approach. The efficient market approach uses such market-determined prices as the current exchange rate or the forward exchange rate to forecast the future exchange rate. The fundamental approach uses various formal models of exchange rate determination for forecasting purposes. The technical approach, on the other hand, identifies patterns from the history of the exchange rate and projects it into the future. The existing empirical evidence indicates that neither the fundamental nor the technical approach outperforms the efficient market approach.

Recommend which method ACME should use to approach the acquisition with regard to valuation. Apply appropriate principles of valuation for financial assets and securities, and determine/estimate the best country as a site for acquisition using current exchange rates.

Additional information for part 1 can be found on these websites https://stats.oecd.org/ and http://fx.sauder.ubc.ca/

Part 2

Go to the https://www.xe.com/currencytables/ and select any foreign currency you believe will appreciate quickly. “Purchase” $10,000 of that currency with the goal of making as much money as possible through currency appreciation over the next few weeks.

In this section describe your reasons for selecting the currency and report how many units of the currency were purchased with $10,000. Predict how you think the currency will change value over the next two weeks, and explain how this might be advantageous for interactional operations.

Part 3

Read the case study below and advise Mr. Peters on his best course of action given the parameters presented. Evaluate the extent to which this will create or reduce international business opportunities for Shrewsbury Herbal Products, Ltd. Provide evidence to support your rationale. Your initial post should be a minimum of 400 words.

MINI CASE Shrewsbury Herbal Products Ltd. Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United Kingdom and in many parts of continental Europe as well. Shrewsbury Herbal generally invoices in British pound sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, it has just received an order from a large wholesaler in central France for £320,000 of its products, conditional upon delivery being made in three months’ time and the order invoiced in euros. Shrewsbury’s controller, Elton Peters, is concerned with whether the pound will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. He thinks this an unlikely possibility, but he decides to contact the firm’s banker for suggestions about hedging the exchange rate exposure. Mr. Peters learns from the banker that the current spot exchange rate in €/£ is €1.4537; thus the invoice amount should be €465,184. Mr. Peters also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are $1.8990/£1.00 and $1.3154/€1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based on the €/£ forward cross-exchange rate implicit in the forward rates against the dollar. What would you do if you were Mr. Peters?