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As the chief financial officer of Bedouin Comfort Juwaher Aldossary is pleased that his current system of exporting Arabic furniture to India seems to be working well. Bedouin Comforts’ primary customer in India, a large furniture chain, has committed itself to purchasing a fixed number of sofas annually for the next three years at a fixed price denominated in rupee, India’s currency. Furthermore, Bedouin Comfort is using an Indian supplier for some of the wood needed to manufacture furniture. Nevertheless, Juwaher is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in India to take advantage of the high interest rates there. As a result of the weak economy in India, however, many foreign investors have lost confidence in India and have withdrawn their funds. In addition, inflation has been relatively high in India.

Juwaher Aldossary has two major concerns regarding these developments. First, she is wondering how these changes in India’s economy could affect the value of the Indian rupee and, consequently, Bedouin Comfort. Second, Juwaher believes that Bedouin Comfort may be able to speculate on the anticipated movement of the rupee, but she is uncertain about the procedure needed to accomplish this. To facilitate Juwaher’s understanding of exchange rate speculation, she has asked you, Bedouin Comforts’ financial analyst, to provide her with detailed illustrations. Juwaher is assuming the rupee would move from a current level of 0.051 SAR to 0.048 SAR within the next 30 days. Based on Juwaher’s needs, she has provided you with the following list of questions to be answered:

1.) How are percentage changes in a currency’s value measured? Illustrate your answer numerically by assuming a change in the Indian rupee value from a value of 0.051 SAR to 0.048 SAR.

As the chief financial officer of Bedouin Comfort Juwaher Aldossary is pleased that his current system of exporting Arabic furniture to India seems to be working well. Bedouin Comforts’ primary customer in India, a large furniture chain, has committed itself to purchasing a fixed number of sofas annually for the next three years at a fixed price denominated in rupee, India’s currency. Furthermore, Bedouin Comfort is using an Indian supplier for some of the wood needed to manufacture furniture. Nevertheless, Juwaher is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in India to take advantage of the high interest rates there. As a result of the weak economy in India, however, many foreign investors have lost confidence in India and have withdrawn their funds. In addition, inflation has been relatively high in India.

Juwaher Aldossary has two major concerns regarding these developments. First, she is wondering how these changes in India’s economy could affect the value of the Indian rupee and, consequently, Bedouin Comfort. Second, Juwaher believes that Bedouin Comfort may be able to speculate on the anticipated movement of the rupee, but she is uncertain about the procedure needed to accomplish this. To facilitate Juwaher’s understanding of exchange rate speculation, she has asked you, Bedouin Comforts’ financial analyst, to provide her with detailed illustrations. Juwaher is assuming the rupee would move from a current level of 0.051 SAR to 0.048 SAR within the next 30 days. Based on Juwaher’s needs, she has provided you with the following list of questions to be answered:

2.) How might the relatively high level of inflation in India affect the rupee’s value? Explain your answer using demand and supply analysis. (Assume a constant level of Saudi inflation)

As the chief financial officer of Bedouin Comfort Juwaher Aldossary is pleased that his current system of exporting Arabic furniture to India seems to be working well. Bedouin Comforts’ primary customer in India, a large furniture chain, has committed itself to purchasing a fixed number of sofas annually for the next three years at a fixed price denominated in rupee, India’s currency. Furthermore, Bedouin Comfort is using an Indian supplier for some of the wood needed to manufacture furniture. Nevertheless, Juwaher is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in India to take advantage of the high interest rates there. As a result of the weak economy in India, however, many foreign investors have lost confidence in India and have withdrawn their funds. In addition, inflation has been relatively high in India.

Juwaher Aldossary has two major concerns regarding these developments. First, she is wondering how these changes in India’s economy could affect the value of the Indian rupee and, consequently, Bedouin Comfort. Second, Juwaher believes that Bedouin Comfort may be able to speculate on the anticipated movement of the rupee, but she is uncertain about the procedure needed to accomplish this. To facilitate Juwaher’s understanding of exchange rate speculation, she has asked you, Bedouin Comforts’ financial analyst, to provide her with detailed illustrations. Juwaher is assuming the rupee would move from a current level of 0.051 SAR to 0.048 SAR within the next 30 days. Based on Juwaher’s needs, she has provided you with the following list of questions to be answered:

3.) How might the relatively high-interest rates in India affect the rupee’s value? Explain your answer using demand and supply analysis. (Assume a constant level of Saudi interest rates)

As the chief financial officer of Bedouin Comfort Juwaher Aldossary is pleased that his current system of exporting Arabic furniture to India seems to be working well. Bedouin Comforts’ primary customer in India, a large furniture chain, has committed itself to purchasing a fixed number of sofas annually for the next three years at a fixed price denominated in rupee, India’s currency. Furthermore, Bedouin Comfort is using an Indian supplier for some of the wood needed to manufacture furniture. Nevertheless, Juwaher is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in India to take advantage of the high interest rates there. As a result of the weak economy in India, however, many foreign investors have lost confidence in India and have withdrawn their funds. In addition, inflation has been relatively high in India.

Juwaher Aldossary has two major concerns regarding these developments. First, she is wondering how these changes in India’s economy could affect the value of the Indian rupee and, consequently, Bedouin Comfort. Second, Juwaher believes that Bedouin Comfort may be able to speculate on the anticipated movement of the rupee, but she is uncertain about the procedure needed to accomplish this. To facilitate Juwaher’s understanding of exchange rate speculation, she has asked you, Bedouin Comforts’ financial analyst, to provide her with detailed illustrations. Juwaher is assuming the rupee would move from a current level of 0.051 SAR to 0.048 SAR within the next 30 days. Based on Juwaher’s needs, she has provided you with the following list of questions to be answered:

4.) How would Bedouin Comfort be affected by a deprecation in the rupee?

As the chief financial officer of Bedouin Comfort Juwaher Aldossary is pleased that his current system of exporting Arabic furniture to India seems to be working well. Bedouin Comforts’ primary customer in India, a large furniture chain, has committed itself to purchasing a fixed number of sofas annually for the next three years at a fixed price denominated in rupee, India’s currency. Furthermore, Bedouin Comfort is using an Indian supplier for some of the wood needed to manufacture furniture. Nevertheless, Juwaher is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in India to take advantage of the high interest rates there. As a result of the weak economy in India, however, many foreign investors have lost confidence in India and have withdrawn their funds. In addition, inflation has been relatively high in India.

Juwaher Aldossary has two major concerns regarding these developments. First, she is wondering how these changes in India’s economy could affect the value of the Indian rupee and, consequently, Bedouin Comfort. Second, Juwaher believes that Bedouin Comfort may be able to speculate on the anticipated movement of the rupee, but she is uncertain about the procedure needed to accomplish this. To facilitate Juwaher’s understanding of exchange rate speculation, she has asked you, Bedouin Comforts’ financial analyst, to provide her with detailed illustrations. Juwaher is assuming the rupee would move from a current level of 0.051 SAR to 0.048 SAR within the next 30 days. Based on Juwaher’s needs, she has provided you with the following list of questions to be answered:

5.) Construct a spreadsheet illustrating the steps Bedouin Comforts’ treasurer would need to follow in order to speculate on expected movements in the rupee’s value over the next 30 days. Also show the speculative profit (in SAR). Assume that Bedouin Comfort can borrow either 10 million SAR or the rupee equivalent of this amount. Furthermore, assume that the following short-term interest rates (annualized) are available to Bedouin Comfort:

Currency

Lending Rate

Borrowing Rate

SAR

8.10%

8.20%

Indian rupee

14.80%

15.40%

Depreciation of the rupee from 0.051 SAR to 0.048 SAR

1. Borrow Indian rupee

2. Convert the Indian rupee to SAR

3. Lend the SAR at 8.10% annualized, which represents a 0.68% return over the 30-day period (computed as 8.10% × (30/360)). After 30 days, Bedouin Comfort would receive

4. Use the proceeds of the SAR loan repayment (on Day 30) to repay the rupee borrowed. The annual interest on the rupee borrowed is 15.40%, or 1.28% over the 30-day period (computed as 15.40% × (30/360)). The total rupee amount necessary to repay the loan is therefore

5. Number of SAR necessary to repay rupee loan

6. Speculative profit

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