plz help me solve those problems, thx
Problem Set # 2 International Financial Management - FIN 440 Fall 2014 Instructor: Mohammad A. Karim Please show all your work, outlining every step. Partial credit will depend on showing all work. 1. If you invest $6,000 in Euro bond for 1 yr paying 5 percent interest. At the time the investor bought the Euro bond, the exchange rate was $1.00 per Euro. 15 points a. If 1 year later you convert the maturity value of the investment in Euro to US dollars, the exchange rate was $ 1.02 per Euro, compute the effective yield in US dollar terms. b. If 1 year later you convert the maturity value of the investment in Euro to US dollars, the exchange rate was $ 0.95 per Euro, compute the effective yield in US dollar terms. 2. ABC Corporation has 90day receivables of Euro 500,000. The following information is available: 25 points Spot rate of the Euro: $ 1.20 per Euro 90day Forward Rate: $ $1.15 per Euro 90day Interest rates are as follows: 90day deposit rate 90day borrowing rate US 5.0 % 7.0 % Euro 5.0 % 7.0 % A call option on Euro that expires in 90days has an exercise price of $1.20 and has a premium of $ 0.03. A put option on Euro that expires in 90days has an exercise price of $1.20 and has a premium of $0.02 The Euro spot rate in 90days is forecasted to be: Possible Rate $1.15 $1.10 Probability 30 % 70 % ABC Corporation is considering: a) A forward hedge b) A money market hedge c) An option hedge and d) Remaining unhedged You have been hired as a consultant to decide on the best possible hedge. Which one of the alternatives you will recommend, and why? Page 1 of 2 3. Another US corporation (XYZ Corporation) has Euro 350,000 in 90day payables. It is considering: 25 points a) A forward hedge b) An option hedge c) Money market hedge and d) Remaining unhedged Using the information in problem # 2, recommend which one of the three alternatives, XYZ Corporation should choose, and why? 4. Spartan Inc. (a US based MNC) is planning to open a subsidiary in Switzerland to manufacture shoes. The new plant will cost SF 1.1 billion. The salvage value of the plant at the end of the 4 yr economic life is estimated to be SF 200 million net of any tax effects. This plant will also call for extra inventory holding of SF 300 million, and extra accounts payables of SF 200 million. Projected sales from this new plant are SF 800 million per year. The fixed costs are estimated to be SF 300 million per year, and the variable costs are estimated to be SF 100 million per year. Depreciation on the new plant after accounting for the salvage value will be SF 300 million per year. The Swiss government will impose a 40 % tax on the earnings. US govt. will not impose any taxes. 100 % of the cash flows will be remitted to the parent. The exchange rate is expected to be stable at $ 0.80 per SF. Spartan requires 15 % return on its capital investments. 35 points Please compute: a) Net Investment Cost of the plant b) Cash flows in years 1 through 4 of the project c) Net Present Value of the project d) Internal Rate of Return (IRR) of the project e) Should the project be accepted or rejected? Why or why not? f) If the exchange rate scenario unfolds as follows, t = time 0 $0.80/SF 1 $0.70/SF 2 $0.70/SF 3 4 $0.60/SF $0.55/SF Recompute the NPV. Is the project still acceptable? Why or why not? g) If the exchange rate scenario were to unfold as follows, t=time 0 $0.80/SF 1 $0.80/SF 2 $0.90/SF 3 4 $0.95/SF $1.00/SF Recompute the NPV. Is the project still acceptable? Why or why not? Page 2 of 2
