Brigham-Houston Ch. 20 · Exchange Rates, PPP, Interest Rate Parity, Currency Exposure & International Capital Budgeting · 2-Week Unit
| Criterion | Excellent (Full) | Proficient (Partial) | Developing (Minimal) | Score |
|---|---|---|---|---|
| Part (a) — PPP & IRP Rate Forecasts PPP: S₁ = $1.28 × (1.035÷1.015) = $1.28 × 1.01970 = $1.305/£ ($ depreciates vs. £ because U.S. inflation higher) · IRP: F = $1.28 × (1.05÷1.03) = $1.28 × 1.01942 = $1.305/£ · Results are consistent — both imply £ strengthens to ~$1.305; higher U.S. inflation and higher U.S. rates both point to dollar weakening long-run |
Both formulas applied with labeled inputs; both results ≈ $1.305/£; consistency explained; direction of dollar interpreted correctly | One formula correct; other has minor error; some directional interpretation | Only one formula attempted; no comparison or interpretation | /6 |
| Part (b) — Forward Hedge Analysis (i) Hedged proceeds = £120,000 × $1.25 = $150,000 · (ii) Unhedged at $1.20: £120,000 × $1.20 = $144,000 · (iii) Cost of hedge = $150,000 − $144,000 = $6,000 benefit (forward is BETTER here) — actually forward gives MORE; but if spot were $1.30: unhedged = $156,000 vs. hedged $150,000 → cost = $6,000 opportunity cost · Recommend hedge: GCI is a small enterprise; certainty of $150,000 outweighs potential gains; transaction exposure could cost thousands on a razor-thin margin |
Both USD amounts correct; cost/benefit of hedge shown; hedge recommendation with reasoning for small business context | One USD amount correct; hedge recommended but reasoning thin | Only one calculation; no recommendation | /6 |
| Part (c) — Nigeria NPV & Political Risk NPV = $22,000 × 3.4331 − $80,000 = $75,528 − $80,000 = −$4,472 → REJECT (negative NPV even before considering additional political risk) · Two political risks: (1) Currency controls — Nigerian government blocks repatriation of profits, trapping cash in naira; (2) Expropriation — government seizure of the workshop without fair compensation; each would reduce actual USD returns below the $22,000 forecast |
NPV = −$4,472 correctly calculated; REJECT recommended; two distinct political risks named and mechanistically explained | NPV correct; only one political risk identified with explanation | NPV attempted but wrong or no political risk discussion | /4 |
| Part (d) — Integrated Strategic Memo | Recommends: hedge the UK receivable with a forward contract (lock in $150,000); reject the Nigeria workshop (negative NPV; political risk makes actual returns worse); states that mastering international financial management — exchange rate risk, parity conditions, and political risk assessment — gives BBYM youth entrepreneurs the tools to participate in global trade and build community wealth without being blindsided by currency volatility; ≥4 underlined vocabulary terms used professionally | Both recommendations made; one with reasoning; some vocabulary terms | Only one recommendation; no connection to community wealth; fewer than 2 terms | /4 |
Sections 1 & 2 auto-grade instantly. Use the rubric selectors for Sections 3 & 4.