| Course | FIN 336 Multinational Corporate Finance |
|---|---|
| Module | Module 2 |
| Paper type | undergraduate assignment applying parity conditions to a currency pair |
| Length | About 1,060 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Finance |
| Updated | October 2026 |
Free sample paper for FIN 336 Module 2
The Real Against the Dollar: Parity, Policy and a Budget Rate
[Student Name]
Southern New Hampshire University
FIN 336: Multinational Corporate Finance
Module Two Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
The Real Against the Dollar: Parity, Policy and a Budget Rate
Introduction
Since 2018 a composite grain bin and dryer maker in Sioux Falls, South Dakota, has invoiced Brazilian farm cooperatives in reais while paying its own workers and steel suppliers in dollars. Every swing in the exchange rate between the Brazilian real (BRL) and the U.S. dollar (USD) therefore lands on its margin. This paper explains how the BRL/USD rate is set, tests whether purchasing power parity and interest rate parity explain its recent path and recommends what rate the company should use when it budgets Brazilian sales for 2026. Throughout, the rate is quoted as reais per dollar, so a higher number means a weaker real.
How the Rate Is Set
The real floats, though Brazil's central bank occasionally sells dollars or currency swaps to calm disorderly trading. Its value is set in the spot market by banks, exporters, importers and investors whose demand for each currency shifts with trade flows, interest rates and expectations. Brazil also limits trading of reais outside the country, so most foreign firms hedge with non-deliverable forwards that settle the difference in dollars rather than delivering reais. Because the real is a commodity currency, it tends to strengthen when soybean, iron ore and oil prices rise and weaken when investors become nervous about emerging markets in general.
The Data
The table gathers year-end rates with annual inflation and policy rates for both countries. Inflation for Brazil is the official consumer price index (IPCA); for the United States it is the consumer price index. Policy rates are the Selic target and the upper bound of the federal funds target range.
BRL/USD, inflation and policy rates, 2021-2025 (approximate)
| Year-end | BRL per USD | Brazil inflation | U.S. inflation | Selic | Fed funds (upper) |
|---|---|---|---|---|---|
| 2021 | 5.58 | 10.1% | 7.0% | 9.25% | 0.25% |
| 2022 | 5.28 | 5.8% | 6.5% | 13.75% | 4.50% |
| 2023 | 4.85 | 4.6% | 3.4% | 11.75% | 5.50% |
| 2024 | 6.18 | 4.8% | 2.9% | 12.25% | 4.50% |
| Mid-2025 | 5.45 | about 5.3% | about 2.7% | 15.00% | 4.50% |
Two things stand out. The real strengthened in 2022 and 2023 even though Brazil's inflation was usually higher than U.S. inflation, and it then lost more than a fifth of its value in 2024, a year when the inflation gap was only about two points.
Purchasing Power Parity
Relative purchasing power parity holds that the expected change in the rate equals the inflation differential. With Brazilian inflation near 4.8 percent and U.S. inflation near 2.9 percent in 2024, the real should have weakened by 1.048 / 1.029, a ratio of 1.018, or 1.8 percent. Starting from 4.85 at the end of 2023, parity pointed to about 4.94 at the end of 2024. The actual rate was 6.18, a miss of roughly 25 percent. Over a longer window the theory does better. From the end of 2020, when the real traded near 5.19, to mid-2025, Brazilian consumer prices rose about 31 percent and U.S. prices about 23 percent, so parity implied a rate near 5.19 x (1.31 / 1.23), or about 5.53. The actual mid-2025 rate of 5.45 was within 2 percent of that value, after swinging far to either side along the way. Taylor and Taylor (2004) reviewed the long debate over this pattern and concluded that parity works as a long-run anchor: deviations are large and take years to fade, so the theory says little about the next quarter.
Interest Rate Parity
Interest rate parity links the forward rate to the interest differential. With the Selic at 15 percent and a U.S. one-year rate near 4.25 percent in mid-2025, the one-year forward should equal 5.45 x (1.15 / 1.0425), or about 6.01 reais per dollar. That is a forward discount on the real of roughly 10 percent. In practice, quoted non-deliverable forwards sat close to this value because banks can arbitrage any large gap by borrowing in one currency and lending in the other. Covered parity is therefore a pricing rule that holds closely, not a forecast.
The uncovered version, which says the future spot rate should equal the forward rate, is weaker. Fama (1984) found that forward premiums tend to predict movement in the wrong direction: high-interest currencies such as the real often hold their value or strengthen for long stretches, which is why investors borrow dollars to earn Brazil's high rates, the carry trade. That carry income is compensation for the risk of sudden falls like the one in late 2024.
Why the Real Fell in 2024
The 2024 slide had little to do with inflation. Investors grew worried that Brazil's government spending would push public debt higher, and a spending package announced in late November disappointed markets. At the same time the dollar strengthened worldwide as U.S. rates stayed high. The central bank sold billions of dollars in December 2024 and raised the Selic sharply from September 2024 onward, reaching 15 percent by June 2025. The real recovered to about 5.45 by mid-2025, helped by those high rates and by a weaker dollar. Meese and Rogoff (1983) showed that standard exchange rate models could not beat a simple random walk at horizons up to a year, and episodes like this one explain why: the drivers were news about fiscal policy and global risk that no parity equation contains.
A Budget Rate for 2026
For the Sioux Falls company, the lesson is practical. It should not budget Brazilian sales at today's spot rate, because interest rate parity already prices a weaker real a year from now, and the forward rate is a price the company can lock in. Using the forward of about 6.0 as the budget rate means that if the firm hedges, its plan is achievable; if it does not hedge, the budget at least does not assume a free gain. The firm should also run its plan at 6.8, near the 2024 low plus a further margin, to see whether Brazilian sales still cover their costs. If they do not, the case for hedging or for producing locally becomes stronger, which is the subject of later modules.
Conclusion
Parity conditions explain the real only partly. Purchasing power parity describes its direction over five years but missed 2024 badly, and covered interest parity sets the forward price but does not predict the spot rate. For a company that bills in reais, the useful conclusion is to plan with the forward rate, test a severe case and hedge where the plan cannot absorb it.
References
Fama, E. F. (1984). Forward and spot exchange rates. Journal of Monetary Economics, 14(3), 319-338. https://doi.org/10.1016/0304-3932(84)90046-1
Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies: Do they fit out of sample? Journal of International Economics, 14(1-2), 3-24. https://doi.org/10.1016/0022-1996(83)90017-X
Taylor, A. M., & Taylor, M. P. (2004). The purchasing power parity debate. Journal of Economic Perspectives, 18(4), 135-158. https://doi.org/10.1257/0895330042632744
What the FIN 336 Module 2 instructions ask for
The Module Two assignment in FIN 336 usually asks how exchange rates are determined in the spot and forward markets and how well theory predicts them. Expect to work with purchasing power parity, the international Fisher effect and interest rate parity, often on a currency pair you choose or are assigned, and to compute a forward rate or an expected future spot rate from inflation or interest rate data. Some versions add a short question on government intervention or on the difference between fixed, managed and floating regimes. The real target is judgment: after doing the arithmetic, explain why actual rates drift away from the parity values and what a company should therefore assume when it plans in a foreign currency.
How this FIN 336 Module 2 exchange rates assignment example is built
The paper picks the real because the composite Sioux Falls company bills Brazilian cooperatives in it. A table lays out year-end rates from 2021 to 2025 next to inflation in both countries and the two central banks' policy rates. Relative purchasing power parity predicts the real should lose about 2 percent a year against the dollar, yet the rate moved more than 20 percent in a single year. Interest rate parity, using a 15 percent Selic rate and a U.S. rate near 4.25 percent, puts the one-year forward about 10 percent above spot. The paper explains the late-2024 slide through fiscal worries and a strong dollar, cites the evidence that random walks beat models over short horizons and closes with a budgeting rule built on the forward rate.
Where the FIN 336 Module 2 rubric puts the points
The grading rubric for this assignment typically looks for correct explanation of how spot and forward rates are set, accurate parity calculations shown step by step, use of real and dated data, critical discussion of why the theories fail in the short run and a practical conclusion for a firm or investor. Top marks go to papers that compute each parity relationship from cited figures, compare the result with what actually happened and draw a reasoned lesson instead of declaring a theory right or wrong. Papers lose points for formulas without numbers, for mixing up direct and indirect quotes, and for undated or unsourced rates. Clear organization, a table of the data used and APA citations account for the remaining criteria.
FIN 336 Module 2 help: the mistakes that cost points
Many drafts stumble on quotation direction before any theory comes in. Decide at the start whether you quote reais per dollar or dollars per real and keep it in every table and formula, because a parity calculation flips sign when the quote flips. Use annual rates over the same period for inflation and interest, and say which index or policy rate you used. Show the arithmetic for each parity condition in a short line, then compare the result with the actual rate on a named date. When the numbers miss, explain why in terms of news, risk premiums or capital flows rather than calling the theory wrong. End with what a business should do with the answer, since the course keeps returning to decisions, not just predictions.
Get FIN 336 Module 2 written to your instructions
Send the FIN 336 Module 2 instructions and the currency pair you were assigned. Your sample will compute the parity conditions from dated data, explain where they fail and turn the result into a rate a company could budget with. Usually two days; your first assignment costs nothing. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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FIN 336 Module 2 questions, answered
Where can I find a free FIN 336 Module 2 Exchange Rates sample?
This page has the complete FIN 336 Module 2 paper testing parity conditions on the real against the dollar and turning them into a budget rate for an exporter.
What is interest rate parity?
The condition that the forward premium or discount between two currencies equals the difference in their interest rates, so that hedged investments earn the same return in either currency.
What does relative purchasing power parity predict?
That a currency's exchange rate will change by roughly the difference between the two countries' inflation rates over time, so higher inflation means a weaker currency.
Why are exchange rates hard to forecast?
Because they react quickly to news about policy, growth, commodity prices and risk, and studies since Meese and Rogoff (1983) show simple models rarely beat a random walk over months.
Is the forward rate a good forecast of the future spot rate?
Not reliably. Fama (1984) found forward premiums tend to point the wrong way, although the forward rate is still the rate a company can lock in today.