Solved: Virginia Co has a subsidiary in Hong Kong and in

Virginia Co. has a subsidiary in Hong Kong and in Thailand. Assume that the Hong Kong dollar
is pegged at $.13 per Hong Kong dollar and it will remain pegged. The Thai baht fluctuates
against the U.S. dollar, and is presently worth $.03. Virginia Co. expects that during this year,
the U.S. inflation rate will be 2 percent, the Thailand inflation rate will be 11 percent, while the
Hong Kong inflation rate will be 3 percent. Virginia Co. expects that purchasing power parity will
hold for any exchange rate that is not fixed (pegged). The parent of Virginia Co. will receive 10
million Thai baht and 10 million Hong Kong dollars at the end of one year from its subsidiaries.
a. Determine the expected amount of dollars to be received by the U.S. parent from the Thai
subsidiary in one year when the baht receivables are converted to U.S. dollars.
b. The Hong Kong subsidiary will send HK$1 million to make a payment for supplies to the Thai
subsidiary. Determine the expected amount of baht that will be received by the Thai subsidiary
when the Hong Kong dollar receivables are converted to Thai baht.
c. Assume that interest rate parity exists. Also assume that the real one-year interest rate in the
United States is presumed to be 1.0 percent, while the real interest rate in Thailand is presumed
to be 3.0 percent. Determine the expected amount of dollars to be received by the U.S. parent if
it uses a one-year forward contract today to hedge the receivables of 10 million baht that will
arrive in one year.

Virginia Co has a subsidiary in Hong Kong and in

ANSWER
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