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Unformatted text preview: Chapter 32: International Corporate Finance 32.1 a. b. 1 c. In direct terms, $1.6317 / Pound In European terms, DM1.8110 / $ The Japanese yen is selling at a premium to the U.S. dollar in the forward markets. Today, at the spot rate, U.S.$ 1 buys 143, while at the 90-day future rate, U.S.$ buys only 142.01. Clearly, Yen are getting more expensive in dollar terms. It will be important to Japanese companies that will receive or make payments in dollars. It will also be important to other international companies outside Japan that must make or receive payments in yen. For these companies, future cash flows depend on the exchange rate. The 3 month forward exchange rate is $0.6743 / SF. The amount of Swiss francs received will be SF148,301.94. = . We should sell dollars. $0.6743 / SF d. $100,000 e. S E/ DM = S Pound/$ S$/ DM = (Pound0.6129 / $)($0.5522 / DM) = Pound 0.3384 / DM
SYen/SF = SYen/$ S$/SF = (Yen143.00/$)($0.6691/SF) = Yen95.6813/SF f. Both banks reduce their exposure to foreign exchange risk. If a bank finds another bank with a complimentary mismatch of cash flows in terms of foreign currencies, it should arrange a swap since both banks' cash flows would be more closely matched. 18 2 4 . 100 / 2 = 50 100 / 7.8 14 There are arbitrage opportunities in a and c, but not in b. False. On the contrary, according to Relative Purchasing Power Parity, an expectation of higher inflation in Japan should cause the yen to depreciate against the dollar. False. Assuming that the forward market is efficient, any expectation of higher inflation in France should be reflected in discounted French francs in the forward market. Therefore, no protection from risk would be available by using forward contracts. True. The fact that other participants in the market do not have information regarding the differences in the relative inflation rates in the two countries will make our knowledge of this fact a special factor that will make speculation in the forward market successful. 32.2 a. b. c. 32.3 a. b. c. Answers to End-of-Chapter Problems B-243 32.4 Approximate spot rate at year-end = 2.5 x (1 + (10% - 5%)) =BD 2.625 / WD 32.5 a. b. 32.6 a. Forward rate = 6 x (1 + 8% / 4) / (1+ 5%/4) = FF6.04 / $ Enter the buy-side position of a 3 month FF forward contract worth 1,000,000 x 6.04 = FF6.04 million Investment in the U.K.: The treasurer can obtain 2.5 million Pounds [= $5 million / ($2 / Pound)]. After investing in the U.K. for three months at 9% he will have 2,556,250 pounds [= 2.5 million pounds x (1 + 0.09 / 4)] The forward sale of pounds will provide $5,150,843.75 (= 2,556,250 Pounds x $2.015 / Pound). Investment in the U.S.: After investing in the U.S. for three months at 12%, the treasurer will have $5,150,000 [= $5,000,000 x (1 + 0.12 / 4)]. 1 + i US 1.13 S(0) = $1.50 / Pound = $1.57 / Pound Forward rate = 1 + i UK 1.08 It all depends on whether the forward market expects the same appreciation over the period and whether the expectation is accurate. Assuming that the expectation is correct and that other traders do have the same information, there will be value to hedging the currency exposure. Investment in the foreign subsidiary will be appropriate if this investment provides direct diversification that shareholders could not attain by investing on their own. The case of a country that represents a political risk would be where the home subsidiary investment would be preferred. Indonesia can serve as a great example of political risk. If it cannot be diversified away, investing in this type of foreign country will increase the systematic risk. As a result, it will raise the cost of the capital. Using the interest rate and purchasing power parity, the expected exchange rate is 1 + i US 1.113 E[S$/ DM (1)] = $ / DM(0) = $0.5 / DM = $0.525 / DM 1 + i WG 1.06 Similarly, 1.113 2 E[S$/ DM (2)] = ( ) $0.5 / DM = $0.5513 / DM 1.06 1.113 3 E[S$/ DM (3)] = ( ) $0.5 / DM = $0.5788 / DM 1.06 DM4,000,000 $0.525/DM NPV = (- DM10,000,000 $0.5/DM) + + 1.15 DM3,000,000 $0.5513/DM (DM3,000,000 + DM2,100,000) $0.5788/DM + 1.152 1.153 = -$5,000,000 + $1,826,087 + $1,250,586 + $1,940,909 = $17,582 b. c. 32.7 a. b. B-244 Answers to End-of-Chapter Problems c. d. Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, a project in a foreign country has a positive NPV, the firm should undertake it. The net present value principle holds for foreign operations. Yes, because it has exchange rate risk. If the foreign currency depreciates, the U.S. parent will experience an exchange rate loss when the foreign cash flow is remitted to the U.S. This problem could be overcome by selling forward contracts. Another way of overcoming this problem would be to borrow in the country where the project is located. Euroyen is yen deposited in a bank outside Japan. False. If the financial markets are perfectly competitive, the difference between the Eurodollar rate and the U.S. rate will be due to differences in risk and government regulation. The difference between a Eurobond and a foreign bond is that the foreign bond is denominated in the currency of the country of origin of the issuing company. Eurobonds are more popular than foreign bonds because of registration differences. Eurobonds are unregistered securities. A foreign bond. In this particular case, a Yankee bond. 32.8 a. b. c. d. Answers to End-of-Chapter Problems B-245 ...
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This note was uploaded on 05/07/2010 for the course FIN 401 taught by Professor Chemistry during the Spring '10 term at Uni Potsdam.
- Spring '10
- Corporate Finance