HighTech is amultinational U.S.A. company that performs diverse activities. It manufactures electronic tools like hand-held digital electronic veniers, digital multimeters, voltage testers etc.

To conduct this manufacturing they import certain electronic components from countries like Japan and South Korea.

The market for the manufactured tools are the U.S.A, Australia, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K. Therefore, the company has already put up a subsidiary in the U.K. It resells and distribute the products to different businesses. The quarterly net profit after tax generated by the subsidiary is 500,000. The exports to Canada and Australia are to other independent distributing companies that buys the tools at wholesale prices from HighTech.

HighTech is also considering the construction of an electronic component manufacturing plant in the U.S.A. to eliminate the risks and costs associated with the current importing of electronic components from countries like Japan and South Korea.

HighTech already has sufficient manufacturing space available and only has to import manufacturing equipment of 63,000,000 Yen from Japan. The installation of the machinery will be conducted by local U.S.A. companies and will cost $1,000,000.

The Chief Executive Officer (CEO) of HighTech, requests the following information to assist him with determining the extent of exchange rate risk and the availability of funds to conduct the multinational transactions:

1. The CEO requires a forecast of the one year and two year exchange rates for the $/ calculated based on purchasing power parity (PPP) and with the International Fisher Effect (IFE) with the following existing available information:

Current $/f spot exchange rate $1.3036/f Expected annual U.S. inflation 0.37% Expected annual British inflation 0.20% Expected U.S. one-year interest rate 0.140% Expected British one-year interest rate 0.077%Annual risk free interest rates: USA 0.140% Japan 0.025% South Korea 0.664% Canada 0.166% UK 0.077% Australia 0.112% South Africa 4.545%Exchange rates: Spot Bid Ask S/JPY 0.0094 0.0095 $/Won 0.0006 0.0008 $/CAD 0.7614 0.7616 $/GBP 1.3034 1.3038 $/AUS 0.7225 0.7226 $/ZAR 0.0606 0.0607 Current borrowing interest rates on loans: Fixed Libor USA 0.640% 0.130% ueder 0.525% 0.015% South Korea 1.164% 0.654% Canada 0.666% 0.156% UK 0.577% 0.067% Australia 0.612% 0.102% South Africa 5.045% 4.535%BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE S Yen Won CADS GBP AUS ZAR Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 1 0.630 0.650 0.515 0.535 1.154 1.174 0.656 0.676 0.567 0.587 0.602 0.622 5.035 5.055 2 0.640 0.660 0.525 0.545 1.164 1.184 0.666 0.686 0.577 0.597 0.612 0.632 5.045 5.065 3 0.650 0.670 0.535 0.555 1.174 1.194 0.676 0.696 0.587 0.607 0.622 0.642 5.055 5.075 4 0.660 0.680 0.545 0.565 1.184 1.204 0.686 0.706 0.597 0.617 0.632 0.652 5.065 5.085 5 0.670 0.690 0.555 0.575 1.194 1.214 0.696 0.716 0.607 0.627 0.642 0.662 5.075 5.095 6 0.680 0.700 0.565 0.585 1.204 1.224 0.706 0.726 0.617 0.637 0.652 0.672 5.085 5.105 7 0.690 0.710 0.575 0.595 1.214 1.234 0.716 0.736 0.627 0.647 0.662 0.682 5.095 5.115 8 0.700 0.720 0.585 0.605 1.224 1.244 0.726 0.746 0.637 0.657 0.672 0.692 5.105 5.125 9 0.710 0.730 0.595 0.615 1.234 1.254 0.736 0.756 0.647 0.667 0.682 0.702 5.115 5.135 10 0.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 0.657 0.677 0.692 0.712 5.125 5.145 Other summarised information: United Kingdom subsidiary profits generated quarterly: 6500,000 Import cost of equipment/machinery for the manufacturing of electronic *63,000,000 components in the U.S.A: Period of time that the components can be paid (in 3 years) Number of payments per year 4 Amount of each payment: *5,250,000Bankers acceptances that HighTech holds: Time till Maturity Acceptance Market maturity value commission rate (Days) B/A for export to Canadian company 45 $1,500,000 1.35% 1.5% B/A for export to Australian company 120 $3,000,000 0.95% 1.25% Existing average interest cost of debt for HighTech = 1.1%Provide your answers in the cells below Payments to be conducted by HighTech subsidiary in the U.K. How often? Monthly = 12/ Quarterly = 4/Semi-annual = 2 Swap bank Yen bid rate Therefore, notional Yen principal calculated with information aboveProvide your answers in the cells below Spot exchange rate $/Yen ask rate Spot exchange rate $/GBP bid rate Therefore, British pound notional principal calculated with information above. Swap bank 3 year GBP ask rate U.K. subsidiary pays quarterly: GBP/Yen Exchange rate locked in for three years:Japanese Swap bank exporter UK subsidiary Notional Yen swap principal Notional GBP swap principal Yen notional principal = GBP notional principal =