Concept explainers
Exchange rates* Look at Table 27.1.
- a. How many Japanese yen do you get for your dollar?
- b. What is the three-month forward rate for yen?
- c. Is the yen at a forward discount or premium on the dollar?
- d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
- e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen?
- f. According to the expectations theory, what is the expected spot rate for yen in three months’ time?
- g. According to
purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?
a)

To discuss: The Country J yen for a dollar.
Explanation of Solution
The Country J yen for a dollar is 112.61 yen for a dollar
b)

To determine: 3-month forward rate for Country J yen.
Explanation of Solution
Using the 3-month forward rate:
The 3-month forward rate for Country J yen is 111.94
c)

To discuss: Whether yen is at a forward premium or discount
Explanation of Solution
The dollar is at forward discount and yen is at a forward premium.
d)

To determine: Annual percentage premium or discount on yen.
Explanation of Solution
Compute annual percentage premium or discount on yen:
Premium=¥112.61¥109.99–1=0.0238, or 2.38 %
e)

To determine: 1-year interest rate on yen
Explanation of Solution
¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%
f)

To determine: Expected spot rate for yen in 3 month.
Explanation of Solution
Expected spot rate for yen in 3 month is ¥111.94=$1
g)

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.
Explanation of Solution
Difference,
Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%
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Chapter 27 Solutions
PRIN.OF CORPORATE FINANCE
- Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $3,310,000 in annual sales, with costs of $2,330,000. Assume the tax rate is 23 percent and the required return on the project is 11 percent. What is the project's NPV? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forwardGyygvvv iiiedfarrow_forwardNeed help in this question.hjarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
