Chun-Kit Ng (632-38-3315)
Brian Low-Thue (617-38-1146)
(Sam) Chun-Tien Wong (635-30-3672)
Mei-Kee Khoo (630-52-1190)
 

FINA 4386
Chapter 2 (Case)


Summary
There is a company, Hull Importing Co., imports small gift, especially from the United Kingdom and Germany. In this case, the mark was pegged to the ECU, but the UK pound is not. The reason why Hull Co. has to worry about the exchange rate because the expenses are directly tied to these currency values. Equally important, Hull has been unable to pass on higher costs.
 

Question 1
Given the information that assuming the value of the ECU and the pound will exhibit about the same degree of volatility against the dollar, there is no change because the anticipated fluctuation (difference) or whether pegged or not is small ( +5%)
 

Question 2
If the Bundesbank intervenes to strengthen the mark vis-a-vis the dollar by 5%, this will affect Hull unfavorable because the U.S. dollar has devaluate and it takes more dollar to buy the same amount of mark.
For example :
US$1      = DM1
US$1.05 = DM1 (with 5% change)
Small unfavorable effect because the issue of 1992 makes the currency becomes a more stabilized currency. Larger unfavorable effect if the entire European unit faces financial crisis, it may have greater effect as the fluctuation of the exchange rate increases.