19.5- Euromarket investment and fund raising A U.S. based multinational company has two subsidiaries, one in Mexico ( local currency, Mexican peso, MP), and one in Japan (local currency yen Y). Forecast the business operations indicate the following short-term financing position for each subsidiary ( in U.S. dollars)

Mexico: $80 million excess cash to be invested (lent)

Japan: $60 million funds to e raised (borrowed)

The management gathered the following data;

Currency

Item US$ MP Y

Spot exchange rate MP 11.60/US$ Y108.25/US$

Forecast percentage change -3.0% +1.5%

Interest rates

Nominal

Euromarket 4.00% 6.20% 2.00%

Domestic 3.75% 5.90% 2.15%

a) Determine the effective interest rate for all three currencies in both the Euromarket and the domestic market, and then indicate where the funds should be invested and raised. ( Note; Assume that because of local regulations a subsidiary is not permitted to use the domestic market of any other subsidiary.)