Exam 3 - Forward Premium/Discount(2 Points Let us look at...

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Forward Premium/Discount (2 Points) Let us look at the exchange rate between two currencies – the “Sophomore IamSternie” currency and the “Junior Jackpot” currency. What is the Annualized Forward Premium or Discount if the today’s spot rate is 1.475 Junior Jackpots/Sophomore IamSternies and the 120 day forward rate is 1.455 Junior Jackpots /Sophomore IamSternies? Current Account Balances (5 points) Assume that the Chinese central bank holdings of foreign assets have grown by $400 Billion. Assume that foreign central bank holdings of Chinese assets have grown by $124 Billion. Assume for this year that Chinese has a current account surplus of $450 Billion (of which unilateral transfers are $30 Billion and the Trade Balance in Goods and Services is 350 Billion). There is no statistical discrepancy (as they hired Stern accounting majors that year!). Questions: What is the financial (i.e. capital) account balance? What is the official settlements balance? Transfer Pricing/Tax Games (5 points) Samsung produces the Galaxy S3 in Korea where the corporate income tax rate is 20 percent. The multinational enterprise ships the Galaxy S3 to its US division. The US subsidiary pays for the shipping costs and pays heavily for advertising and distribution of the Galaxy S3. The US corporate income tax rate is 35 percent. More Facts: *Cost to produce in Korea is $250 per unit. *The initial sale price of the Galaxy Tab is $325 per unit from the Korean to the US subsidiary, which the firm is ready to change. *The final sale price in the US to consumers is $550 (which is fixed). *The cost of shipping, advertising and distribution for the US subsidiary is $95 per unit. *Assume it sells 200,000 Galaxy S3s a year in the US. (1) Compute the total after tax profits if it chooses a transfer price of $420.
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(2) Compute the total after tax profits if it chooses a transfer price between these two business units that minimizes its taxes. Covered Interest Arbitrage (5 points) You are an investment manager in Brazil . You see different interest rates around the world and your exchange trading team (as always staffed by Stern alums) has provided you with the current spot rate and an expected future spot rate for the Indian Rupee and Brazilian Real currencies. *The 1 year interest rate on the India Rupee-denominated bank deposit is 9% *The 1 year interest rate on the Brazil Real-denominated bank deposit is 3% *Current spot exchange rate is 27 Indian Rupee per Brazilian Real
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