U.S. Dollar value of the Zimbabwe


Section A

Answer all the questions


On August 8, 2000, Zimbabwe changed the value of the Zimbabwe dollar from Z$38/U.S.$ to Z$50/U.S.$.

  1. What was the original U.S. dollar value of the Zimbabwe dollar?
  2. What is the new U.S. dollar value of the Zimbabwe dollar?
  3. By what percent has the Zimbabwe dollar appreciated (depreciated) relative to the U.S. dollar?
  4. By what percent has the U.S. dollar appreciated (depreciated) relative to the Zimbabwe dollar?


A Polish firm expects to receive an €11 million payment in 90 days from a German customer. The current spot rate is €0.29870 : zł1 and the 90-day forward rate is €0.29631: zł1. In addition, the annualized three-month euro and zloty interest rates are 9.8% and 12.3%, respectively.

  1. What is the hedged value of the euro receivable using the forward contract?
  2. Describe how the Polish firm could use a money market hedge to lock in the zloty value of the euro receivable. What is the hedged value of the euro receivable?
  3. What is the effective forward rate that the Polish firm can obtain using this money market hedge?
  4. Which hedge would the Polish firm prefer?
  5. At what 90-day forward rate would interest rate parity hold?
  6. Given your answers in parts a and b, is there an arbitrage opportunity? Explain your answer with detailed calculations.


  1. Suppose that a foreign project has a beta of 0.85, the risk-free return is 12 percent, and the required return on the market is estimated at 19 percent. What is the cost of capital for the project?
  2. ABC Computer is a US firm that produces its machines in Asia with components largely imported from the United States and sells its products in various Asian nations in local currencies.
  3. Explain how strengthening of dollar will likely impact the ABC’s Asian profits.
  4. What hedging technique(s) can ABC employ to lock in a desired currency conversion rate for its Asian sales during the next year?


You are the manager of a multinational company. You are exploring the opportunity of investing into international projects. You would like to take up the projects that will have high net present values. To help make your decision, you are required to calculate the cost of capital for your company. Discuss the ways in which you can determine the beta for an international project.


As a VP of a firm, you are looking into opportunities to invest internationally.Discuss the reasons for pursuing Foreign Direct Investments (FDIs).

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