A Canadian company has a division in Mexico. The Canadian company needs toborrow money for its Mexican division and has the choice of borrowing in Mexico orCanada. The effective annual interest rate in Canada is 6 percent and the interestrate in Mexico is 10 percent. The current exchange rate is 15 Mexican pesos perCanadian dollar. If you believe that the Canadian dollar will depreciate 10 percentagainst the Mexican peso over the next 6 months, where should the companyborrow? For simplicity, assume that the company wants to borrow $100 dollars for6 months. bsN

When a company has various alternatives to borrow money it should evaluate each alternative…

Answered: A Canadian company has a division in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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AireAsia, headquartered in Kunming, China, needs US$5,000,000 for one year to finance working capital (assume annual compounding). The airline has two alternatives for borrowing: Borrow US$5,000,000 in Eurodollars in London at 2.50% per annum Borrow HK$38,750,000 in Hong Kong at 4.00% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.75/US$ for U.S. dollars. At what ending exchange rate would AireAsia be indifferent between borrowing U. S. dollars and borrowing Hong Kong dollars?
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$2.00 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.80 per F$. Suppose that Retrojo negotiates a forward contract with a bank, which commits it to purchasing Fijian dollars at F $2,000,000.00 at $0.80 per Fijian dollar in 90 days. Thus, Retrojo knows with certainty that it will need F$2,000,000.00×$0.80 per Fijian dollars =$1,600,000.00 for this exchange. Assume the Fijian dollar depreciates over this time period to $0.67 per Fijian dollar. If this were the case the outside of the contract only (U.S. dollars) would be needed to exchange for the required F$2,000,000.00.
2. Caterpillar (CAT), a US multinational, wants to borrow 150 million Canadian dollars at a fixed rate of interest for five years. Algoma Steel, a Canadian integrated steel manufacturer, wants to borrow 100 million US dollars at a floating rate of interest for five years. (The current exchange rate is 1.50 CAD/USD.) They have been quoted the following annual rates for five-year loans. CAD USD Caterpillar Algoma Steel 7.8% LIBOR + 1.2% 6.0% LIBOR + 0.6% a) Design a swap that will net a bank, acting as an intermediary, 40 basis points per annum. Make the swap equally attractive to the companies and ensure that the bank assumes all foreign exchange risk. What are the borrowing rates for both companies after they enter into the swap? Illustrate the swap with a diagram. b) Provide a numerical example how the bank could hedge exchange rate risk in a). c) Describe how the swap contract will be designed so both companies share the total gain equally if there is no bank acting as an…
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.10 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.53 per F$. If Retrojo were to exchange U.S. dollars for the required F$1,100,000.00 Fijian dollars, it would need $ (U.S. dollars). If Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.64 during those 90- days, then Retrojo would need $ (U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract.
Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥300 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥100 = $1. The current interest rate on one-year U.S. Treasury bills is 6%, and on one-year Japanese government bonds the interest rate is 4%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need $ to exchange today in order to have ¥300 million in one year. (Round your response to the nearest dollar)
OneUSF, a U.S. MNC based in Florida, is considering making a fixed direct investment in Italy. The Italian government has offered OneUSF a concessionary loan of €2,700,000 at a rate of 3 percent per annum. The current spot rate is $1.36/€1.00 and the expected inflation rate is 4% in the U.S. and 2% in Italy. The normal borrowing rate is 7 percent in dollars and 6 percent in euros. The loan schedule calls for the principal to be repaid in three equal annual installments. The marginal corporate tax rate in Italy and the U.S. is 35%. What is the present value of the benefit of the concessionary loan? (Please keep 2 digits in decimals to get the right answer) $117,160 None of the above with the $10,000 of the correct answer $51,360 $1,165,209 $1,310,116
Required: Zeda Incorporated, a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK14,600,000 at a rate of 4 percent per annum. The normal borrowing rate is 6 percent in dollars and 5.5 percent in Danish krone. The loan schedule calls for the principal to be repaid in three equal annual installments. What is the present value of the benefit of the concessionary loan? The current spot rate is DKK 5.60 per $1.00 and the expected inflation rate is 3 percent in the United States and 2.5 percent in Denmark. Note: Round the exchange rates to two decimal places. Round the intermediate calculations and final answer to nearest whole number. Present value of the benefit of the concessionary loan
Toyota corporation is a Japanese automotive manufacturing company. The CFO is considering opening their new factory to assemble trucks in North Carolina, USA. The real discount rate required for the project is 12%. The inflation rate in Japan is 2%, and the inflation rate in the United States is 4%. Compare the nominal discount rates for the two project options, the first option is doing the project as an investment in US dollar, and the second option in their local currency the Japanese Yen.
The treasurer of a major U.S. firm has $22 million to invest for three months. The interest rate in the United States is .22 percent per month. The interest rate in Great Britain is .27 percent per month. The spot exchange rate is £.622, and the three-month forward rate is £.624. Ignore transaction costs. What would be the value of the investment in three months if the money is invested in the U.S. or if it is invested in Great Britain? (Do not round intermediate calculations and enter your answers in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) U.S. Great Britain
Suppose your company imports computer motherboards from Singapore. The exchange rate is $1.4073 per Singapore dollar. You have just placed an order for 35,062 motherboards at a cost to you of S158 Singapore dollars each. You will pay for the shipment when it arrives in 90 days. You can sell the motherboards for $113 each. Calculate your profit if the exchange rates goes down by 14.51% over the next 90 days.
Suppose your company imports computer motherboards from Singapore. The exchange rate is $1.3595 per Singapore dollar. You have just placed an order for 39328 motherboards at a cost to you of S146 Singapore dollars each. You will pay for the shipment when it arrives in 90 days. You can sell the motherboards for $118 each. Calculate your profit if the exchange rates goes down by 12.23% over the next 90 days. NOTE: Enter the number rounding to four DECIMALS. If your decimal answer is 0.034576
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