Ross5eChap32sm - Chapter 32: International Corporate...

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Chapter 32: International Corporate Finance 32.1 a. In direct terms, C$2.1802/₤ In indirect terms, €1.4926/ C$ b. The Japanese yen is selling at a premium to the Canadian dollar in the forward markets. Today, at the spot rate, 1 C$ buys ¥109.38, while at the 1– month forward rate, 1C$ buys only ¥109.17. c. 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. They might use currency swaps or currency options to hedge their risk. d. The 3– month forward exchange rate is C$2.1677/₤. The amount of British pounds received will be £ / 1677 . 2 $ 000 , 100 $ 84 . 131 , 46 £ C = We should sell dollars. e. Pound/Euro = e £/US$ * e US$/€ Pound/Euro = (₤ 0.5038/$) (US$ 1.3590/€) = ₤0.6847/€ Yen/SF = e ¥/US$ * e US$/SF Yen/SF = (120.22) (0.8229) = ¥ 98.92/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. 32.2 a. 1.6 x 2.1= 3.36 ≠3.8 b. 100 / 2 = 50 c. 14 1 . 9 / 100 There are arbitrage opportunities in a and c, but not in b. 32.2 a. False. If prices are rising faster in Great Britain, it will take more pounds to buy the same amount of goods that one dollar can buy; the pound will depreciate relative to the dollar. b. False. The forward market would already reflect the projected deterioration of the euro relative to the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn’t reflected in forward rates today, will the forward hedge protect you against additional declines. Answers to End-of-Chapter Problems B-170
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c. True. The market would only be correct on average, while you would be correct all the time. 32.4 If we invest in Canada. for the next ix months, we will have: $15,000,000 (1.03) = $15,450,000 If we invest in France, we must exchange the dollars today for Euros, and exchange the Euros for dollars in six months. After making these transactions, the dollar amount we would have in six months would be: ($15,000,000)(1/1.4)(1.035)(1.42) = $15,746,785.71 We should invest in France. 32.5 a. If IRP holds, then: F– 180 = (Kr 6.43)[1 + (0.08 – 0.05)] 1/2 F– 180 = Kr 6.5257 Since given F– 180 is Kr6.56, an arbitrage opportunity exists; the forward premium is too high. Borrow Kr1 today at 8% interest. Agree to a 180– day forward contract at Kr 6.56. Convert the loan proceeds into dollars:Kr 1 ($1/Kr 6.43) = $0.15552
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This note was uploaded on 07/18/2010 for the course ECONMICS ECM359 taught by Professor Matazi during the Summer '10 term at University of Toronto- Toronto.

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Ross5eChap32sm - Chapter 32: International Corporate...

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