On August 28, 1990, IBM International Finance NV-the Dutch Antillesbased international finance subsidiary of IBM Corporation-issued four 100 million dollar equivalent tranches of Eurobonds respectively denominated in U. S.

dollars, pounds sterling, French francs, and Swiss francs and maturing on August 28, 1995 at par. Each bond pays semiannual coupons at the rate of 8 5/8%, 11 7/8%, 10%, and 43/8%, respectively.

(a) On August 28, 1991, the market values of each bond were at 99.88%, 97.25%,95.63%, and 103%. Anticipating that the pound sterling would shortly drop out of the European Monetary System, the treasurer of IBM was considering swapping both the French franc and U.S. dollar tranches into 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 above information the market expectations of the exchange rate relationships between U. S. dollars, pounds sterling, French francs and Swiss francs? On August 28, 1991, the spot exchange rates were U.S. dollar 1 = British pound .59 = French franc 5.9045 = Swiss franc 1.5173.