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# CH28 - CHAPTER 28 Managing International Risks Answers to...

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CHAPTER 28 Managing International Risks Answers to Practice Questions 1. Answers here will vary, depending on when the problem is assigned. 2. a. The dollar is selling at a forward premium on the baht. b. c. Using the expectations theory of exchange rates, the forecast is: \$1 = 44.555 baht d. 100,000 baht = \$(100,000/44.555) = \$2,244.42 3. We can utilize the interest rate parity theory: If the three-month rand interest rate were substantially higher than 5.07%, then you could make an immediate arbitrage profit by buying rands, investing in a three-month rand deposit, and selling the proceeds forward. 4. Answers will vary depending on when the problem is assigned. However, we can say that if a bank has quoted a rate substantially different from the market rate, an arbitrage opportunity exists. 5. Our four basic relationships imply that the difference in interest rates equals the expected change in the spot rate: We would expect these to be related because each has a clear relationship with the difference between forward and spot rates. 45 1.89% .0189 0 1 44.345 44.555 4 = = - × 5.07% 0.0507 r 8.3693 8.4963 1.035 r 1 rand rand = = = + L/\$ L/\$ L/\$ L/\$ \$ L s ) (s E s f r 1 r 1 = = + + \$ / rand \$ / rand \$ rand s f r 1 r 1 = + +

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6. If international capital markets are competitive, the real cost of funds in Japan must be the same as the real cost of funds elsewhere. That is, the low Japanese yen interest rate is likely to reflect the relatively low expected rate of inflation in Japan and the expected appreciation of the Japanese yen. Note that the parity relationships imply that the difference in interest rates is equal to the expected change in the spot exchange rate. If the funds are to be used outside Japan, then Ms. Stone should consider whether to hedge against changes in the exchange rate, and how much this hedging will cost. 7. a. Exchange exposure . Compare the effect of local financing with the export of capital from the U.S. b. Capital market imperfections . Some countries use exchange controls to force the domestic real interest rate down; others offer subsidized loans to foreign investors. c. Taxation . If the subsidiary is in a country with high taxes, the parent may prefer to provide funds in the form of a loan rather than equity. d. Government attitudes to remittance. Interest payments, royalties, etc., may be less subject to control than dividend payments e. Expropriation risk. Although the host government might be ready to expropriate a venture that was wholly financed by the parent company, the government may be reluctant to expropriate a project financed directly by a group of leading international banks. f. Availability of funds, issue costs, etc. It is not possible to raise large sums outside the principal financial centers. In other cases, the choice may be affected by issue costs and regulatory requirements. For example, Eurodollar issues avoid SEC registration requirements.
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