P19-5

Euro market 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). Forest coast of business operations indicate the following short-term financing position for each subsidiary (in equilavent U.S. dollars):

The management gathered the following data:

Currency

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Item US$ MP Y

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Spot exchange rates MO 11.60/US$ Y108.25/US$

Forecast percent change -3.0% +1.5%

Interest rates

Nominal

Euromarket 4.00% 6.20% 2.00%

Domestic 3.75% 5.90% 2.15%

Effective

Euromarket ______ _______ _______

Domestic ______ _______ _______

Determine the effective interest rates for all three currencies in both the Euro market and the domestic market, and then indicate where the funds should be invested and raised. (Note: Assume that