Danielle Gardner Donna Zviely Garrett McCulloch

 Relative interest rates: ◦ Higher short term and long term rates in Europe than most other major currencies  Expected to attract foreign investment  Dollar depreciates and Euro appreciates  Safe Haven Effect: ◦ will strengthen Euro if investment flees from US to an alternate stable currency  Political/country risk: ◦ low political risk and country risk in the euro zone.  Carry Trade Strategies: ◦ speculators buy high interest currencies and sell currencies with low interest rates, thus investors may purchase the Euro which has a higher interest rate than most, creating upward pressure on the currency and increase demand for the Euro  Unemployment is 9.2% in Europe, while 9.1 % in US  Current Account in EUR is -25; US Current-account deficit decreased $53.4 billion to $101.5 billion in Q  Growth rate in EUR is -4.8% while Q % ◦ Slowing rate of contraction  In conclusion, the 3-month and 6-month spot rates will increase slightly against the USD. We predict a rate of $1.42 for 3-month spot, and $1.44 for the 6-month spot rate.

Assume:  Spot EUR/USD: (as of June 26, 2009)  Forecasted EUR rate of inflation for the next 12 months: 1.6%  Forecasted US rate of inflation for the next 12 months: 1.3%  Anticipated inflation rate differential =.3% PPP Spot EUR/USD Forecast:  1 year change in EUR: x =  3 month spot EUR: /4 =  6 month spot EUR: /2 =

Assume:  Spot EUR/USD = $  Current 3 month ECB rate = 0.596%  Current 6 month ECB rate = 0.601%  Current 3 month US Govt Bond rate = 0.15%  Current 6 month US Govt Bond rate = 0.09%  Differential 3 month = – 0.15 = 0.446%  Differential 6 month = – 0.09 = 0.511%  Spot rate x differential = 3 month change = x =  Spot rate x differential = 6 month change = x = IFE Spot EUR/USD:  3 month Spot EUR = – =  6 month Spot EUR = – = ata m_target_page=Rates

June 26 Spot = month spot % change6 month spot % change Asset Choice$ %$ % PPP$ %$ % IFE$ %$ % Our Choice: For both the 3-month and 6-month rates, we will choose the PPP model. These rates are neither the highest nor lowest, so we are being conservative with the middle selection

 MNC open short: 3-month spot rate with the PPP model is $ month =  This MNC is paying debt off in euro or making a euro denominated purchase, so they should not hedge with a futures contract because dollar- equivalent-costs will become lower in the future.  The euro is depreciating against the dollar from $ to $ so a hedge would be detrimental to the financial value of the American based MNC. The same holds for the 6-month spot rate, because the euro will further depreciate against the dollar according to the PPP model that we have chosen.

 MNC open long: 3-month spot rate with the PPP model is $ month =  This MNC is receiving euro, most likely from conducting business in the euro zone, so we will advise them to lock in a forward rate now, to assure a higher USD-equivalent-value than would be attained without the contract.  Since the euro will depreciate against the USD, the firm receiving euro will gain higher cash flows by locking in a forward contract with the current exchange rate of $ The euro is not expected to depreciate enough to use an options contract and pay the premium.

Euro Bond rates