Question 17:The Grupo Monterrey is a Mexican multinational company that is considering borrowing the equivalent of $ 20,000,000 for the next 3 years. It traditionally borrows in dollars, but due to dislocations in the foreign currency markets, its investment banker suggested that they consider borrowing in an alternative currency. The bankers will price the debt (in either currency) close to par (that is the annual yield to maturity would equal the annual coupon rate). The bonds would make annual interest payments and the principal will be returned at maturity, regardless of the currency. If the bonds are issued in dollars, they would raise $ 20,000,000 and the annual coupon rate will be 4.25%. If the bonds are issued in euros, they would raise14,500,000 and the annual coupon will be 3.75%.The spot exchange rate is $ 1.3793/. The following information aboutinterest rates is also given:

Interest rates by maturity (% annual)

Dollar

Euro

1-year

$ 0.48

E 0.95

2-year

$1.10

E 1.00

3 - year

$1.79

E 0.89

Question 17 part a:Calculate the forward exchange rates (in $per ) for 1-year, 2-year and 3-year. (show your calculations to get credit) (one page maximum)

Question 17 part b:If Grupo Monterrey were to borrow in euros, what would be the cash flows at today, one year from today, 2 years from today and 3 years from today in dollar terms? Will Grupo Monterrey choose to borrow in dollars or in euros? (show your calculations to get credit) (one page maximum)