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, ). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars):

Mexico: $90 million excess cash to be invested (lent)

Japan: $68 million funds to be raised (borrowed)

The management gathered the following data:

CURRENCY

ITEM US$ MP

Spot exchange rates MP11.63/US$ 108.52/US$ Forecast percent change -2.98% +1.54% Interest rates Nominal Euromarket 4.05% 6.19% 1.99% Domestic 3.74% 5.93% 2.14%

Determine the effective interest rates for all three currencies in both the Euromarket and the domestic market; 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.)