Pleaseshowallyourwork,outliningeverystep.Partialcreditwilldependonshowingallwork. 1.Ifyouinvest$6,000inEurobondfor1yrpaying5percentinterest.Atthetimetheinvestor boughttheEurobond,theexchangeratewas$1.00perEuro.

a. If1yearlateryouconvertthematurityvalueoftheinvestmentinEurotoUSdollars,the exchangeratewas$1.02perEuro,computetheeffectiveyieldinUSdollarterms.

b. If1yearlateryouconvertthematurityvalueoftheinvestmentinEurotoUSdollars,the exchangeratewas$0.95perEuro,computetheeffectiveyieldinUSdollarterms.

2.ABCCorporationhas90dayreceivablesofEuro500,000.Thefollowinginformationisavailable: SpotrateoftheEuro:$1.20perEuro 90dayForwardRate:$$1.15perEuro 90dayInterestratesareasfollows: US Euro 90daydepositrate 5.0% 5.0% 90dayborrowingrate7.0% 7.0% AcalloptiononEurothatexpiresin90dayshasanexercisepriceof$1.20andhasa premiumof$0.03.AputoptiononEurothatexpiresin90dayshasanexercisepriceof $1.20andhasapremiumof$0.02 TheEurospotratein90daysisforecastedtobe: PossibleRate Probability $1.15 30% $1.10 70% ABCCorporationisconsidering:

a)Aforwardhedge

b)Amoneymarkethedge

c)Anoptionhedgeand

d)Remainingunhedged

Youhavebeenhiredasaconsultanttodecideonthebestpossiblehedge.Whichoneofthe alternativesyouwillrecommend,andwhy?

3.AnotherUScorporation(XYZCorporation)hasEuro350,000in90daypayables.Itis considering: a)Aforwardhedge

b)Anoptionhedge

c)Moneymarkethedgeand

d)Remainingunhedged

Usingtheinformationinproblem#2,recommendwhichoneofthethreealternatives,XYZ Corporationshouldchoose,andwhy? 4.SpartanInc.(aUSbasedMNC)isplanningtoopenasubsidiaryinSwitzerlandtomanufacture shoes.ThenewplantwillcostSF1.1billion.Thesalvagevalueoftheplantattheendofthe4yr economiclifeisestimatedtobeSF200millionnetofanytaxeffects.Thisplantwillalsocallfor extrainventoryholdingofSF300million,andextraaccountspayablesofSF200million.Projected salesfromthisnewplantareSF800millionperyear.ThefixedcostsareestimatedtobeSF300 millionperyear,andthevariablecostsareestimatedtobeSF100millionperyear.Depreciation onthenewplantafteraccountingforthesalvagevaluewillbeSF300millionperyear.TheSwiss governmentwillimposea40%taxontheearnings.USgovt.willnotimposeanytaxes.100%of thecashflowswillberemittedtotheparent.Theexchangerateisexpectedtobestableat$0.80 perSF.Spartanrequires15%returnonitscapitalinvestments.

Pleasecompute:

a)NetInvestmentCostoftheplant

b)Cashflowsinyears1through4oftheproject

c)NetPresentValueoftheproject

d)InternalRateofReturn(IRR)oftheproject

e)Shouldtheprojectbeacceptedorrejected?Whyorwhynot?

f)Iftheexchangeratescenariounfoldsasfollows, t=time 0 1 2 3 4 $0.80/SF $0.70/SF $0.70/SF $0.60/SF$0.55/SF RecomputetheNPV.Istheprojectstillacceptable?Whyorwhynot? g)Iftheexchangeratescenarioweretounfoldasfollows, t=time 0 1 2 3 4 $0.80/SF $0.80/SF $0.90/SF $0.95/SF$1.00/SF RecomputetheNPV.Istheprojectstillacceptable?Whyorwhynot?