Question

Q1. Suppose International Retailer, Ltd. (IRL) had inventory in Britain valued at 325,000 pounds one year ago. The exchange rate for dollars to pounds was 1 pound = 2 U.S. dollars. This year the exchange rate is 1 pound = 1.82 U.S. dollars. The inventory in Britain is still valued at 325,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates? 

Q2.A U.S.-based company, American Construction, Inc., arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.05 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Stewart must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.05 pesos per dollar through the end of the loan period, what nominal interest rate will Stewart end up paying on the loan? 

Answer 1

1. Since the pound depreciated with respect to dollar, there is a loss in inventory value in U.S. dollars.
Loss = 325000pounds*(2-1.82)dollars/pound = 58500 dollars

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