A U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexicanpeso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars): Mexico:$80 million excess cash to be invested (lent) Japan: $60 million funds to be raised (borrowed) Currency Item US $ MP ¥ Spot exchange rates MP11.60/US$ ¥108.25/US$ Forecast percentage change −3.00% +1.50% Interest rates Nominal Euromarket 4.00% 6.20% 2.00% Domestic 3.75% 5.90% 2.15% Effective Euromarket Domestic Euromarket and the domestic market; then indicate where the funds should be invested and raised. (Note:Assume that because of local regulations, a subsidiary is not permitted to use the domestic market of any other subsidiary.) The effective interest rate in the Euromarket for the US$ is ? _____% (round to two decimal places)

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 12QA

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Question

A U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexicanpeso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars):

Mexico:$80 million excess cash to be invested (lent)

Japan: $60 million funds to be raised (borrowed)

Currency
Item	US $	MP	¥
Spot exchange rates		MP11.60/US$	¥108.25/US$
Forecast percentage change		−3.00%	+1.50%
Interest rates
Nominal
Euromarket	4.00%	6.20%	2.00%
Domestic	3.75%	5.90%	2.15%
Effective
Euromarket
Domestic