12. Bond yields and exchange rate forecasts (advanced). On August 28, 2010, IBM International Finance NV – the Dutch Antilles–based international finance subsidiary of IBM Corporation – issued four $100 million equivalent tranches of Eurobonds respectively denominated in U.S. dollars, pounds sterling, euros, and Swiss francs, and maturing on August 28, 2015, at par. Each bond pays semiannual coupons at the rate of 85∕8 percent, 117∕8 percent, 10 percent, and 43∕8 percent, respectively.

a. On August 28, 2011, the market values of the bonds were at 99.88 percent, 97.25 percent, 95.63 percent, and 103 percent, respectively. Anticipating that the pound sterling would shortly depreciate, the treasurer of IBM was considering swapping both the euro and U.S. dollar tranches for sterling. What is the minimum annual rate of sterling devaluation necessary to warrant such a reconfiguration of the currency denomination of the debt?

b. Can you infer from the previous information the market expectations of the exchange rate relationships between U.S. dollars, pounds sterling, euros, and Swiss francs? On August 28, 2011, the spot exchange rates were U.S. dollar 1 = British pound 0.59 = euro 0.7990 = Swiss franc 1.0173.