Question-3: Arundel Partners are contemplating an investment in Argentina. They gather data to determine the appropriate return to their equity investors. Their data suggest that Argentine equity market is 2.5 times more volatile than the US equity market; they estimate the project beta as 1.5, and the project has 100% exposure to Argentina country risk. Arundel partners assume that US risk-free rate is 3% and US EMRP is 5.5%. Given the volatility of the Peso and difficulty of hedging peso cash flows, Arundel partners think that a 3% additional currency risk premium (ie. Measure of Currency Risk x Unit Price of Currency Risk) is warranted on top of the Country Risk Premium. A. What is the Estimate CRP for Argentina based in relative equity market volatility? B. What should be the required rate of return Arundel shareholders expect in USD terms assuming 100% country risk exposure. C. What should be the required rate of return if the country risk were scaled the same as the market risk of the asset? D. If the Argentine credit default risk premium is 400 bp and equity market volatility to bond market volatility ratio is 1.4, what should be the Argentina Country Risk Premium?

Hint: Review the Nextel Peru case