1. Assume covered interest parity holds. (a) What is Carrefour's cost of borrowing in the four currencies if they hedge their exchange rate exposure in the forward market? (b) Are these costs comparable? (c) Why or why not? Ignore transaction costs. 2. (a) How large would transaction costs in the forward market have to be to eliminate the cost advantage of GBP debt relative to EUR debt? Think about transaction costs in percentage terms. For example, if the EUR/GBP forward rate is 1.60 (calculated using the interest rates in Exhibit 8), then bid and ask prices of 1.584 and 1.616 would represent round-trip transaction costs of 2% (the bid and ask prices are 1% lower and 1% higher than the calculated rate). Assume transaction costs are the same, in percentage terms, at all maturities. Ignore transaction costs in the spot market for the purposes of this exercise. This question is a perfect opportunity to use Solver in Excel. (If you know how to use it, then use it. If not, learn how to use it, then use it!) 3. (a) What are Carrefour's absolute and multiplicative credit spreads in the four currencies? Calculate credit spreads on a par yield basis. The par yields (interest rates) for Carrefour in the four currencies are given. For the relevant risk-free rate, you need to calculate the yield (coupon) on a risk-free, annual coupon bond that would trade at par in each currency using the zero rates in Exhibit 8. To make these calculations, again, use Solver. (b) Do these spreads explain the relative borrowing costs calculated in question 1? In other words, if the multiplicative credit spreads calculated in this way were equal across currencies would the costs be equal as well? Why or why not? 4. Assume Carrefour issues a GBP bond at a cost (gross spread of 3%), meaning that 3% of the proceeds of the bond issue are used to pay the underwriters. (a) What is Carrefour's All-in-Cost (its AIC) in EUR of this GBP bond? Ignore transaction costs in the spot and forward markets