8 If the northern branch and the southern branch worked together, the northern branch could loan its £15 million to the southern branch. Nevertheless, one could argue that the branches could not take advantage of interest rate differentials or expected exchange rate effects among currencies. Given the data provided in this example, would you recommend that the two branches make their short-term investment or financing decisions independently, or should the northern branch lend its excess cash to the southern branch? Explain.

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Kent plc is a large UK firm with no international business. It has two branches within the UK, a southern branch and a northern branch. Each branch currently makes investing or financing decisions independ- ently, as if it were a separate entity. The northern branch has excess cash of 15 million to invest for the next year. It can invest its funds in Treasury bills denominated in pounds or in any of four foreign curren- cies. The only restriction enforced by the parent is that a maximum of 5 million can be invested or financed in any foreign currency. The southem branch needs to borrow 15 million over one year to support its UK operations. It can borrow funds in any of these same currencies (although any foreign funds borrowed would need to be con- verted to pounds to finance the UK operations). The only restriction enforced by the parent is that a maxi- mum equivalent of 5 million can be borrowed in any single currency. A large bank serving the international money market has offered Kent ple the following terms: Currency Annual interest rate on deposits Annual interest rate charged on loans British pound 6% 9% Australian dollar 11 14 Canadian dollar 7 10 New Zealand 9 12 dollar Japanese yen 8 11 The parent of Kent plc has created one-year forecasts of each currency for the branches to use in making their investing or financing decisions: Currency Today's spot exchange rate Forecasted annual percentage change in exchange rate Australian dolar 11 14 Canadian 7 10 dolar New Zealand 9 12 dollar Japanese yen 8 11