DuPont's cash balance. The treasurer of E.I. DuPont de Nemours has a $500 million cash balance to invest over the next six months. She has been instructed to play it safe and to avoid unduly speculative risks. She has narrowed her options to dollar-denominated P-1 commercial paper yielding 4 percent annually or Mexican peso–denominated certificates of deposit yielding 12 percent annually issued by AAA-rated Banco Mercantil of Mexico. The spot dollar price of one Mexican peso is US$0.080 and a six-month forward peso costs US$0.075. Where should the funds be invested? Is interest rate parity holding?

DuPont's cash balance. The treasurer of E.I. DuPont de Nemours has a $500 million cash balance to invest over the next six months. She has been instructed to play it safe and to avoid unduly speculative risks. She has narrowed her options to dollar-denominated P-1 commercial paper yielding 4 percent annually or Mexican peso–denominated certificates of deposit yielding 12 percent annually issued by AAA-rated Banco Mercantil of Mexico. The spot dollar price of one Mexican peso is US$0.080 and a six-month forward peso costs US$0.075. Where should the funds be invested? Is interest rate parity holding?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 3P

See similar textbooks

Similar questions

The Bank of Willaine, Inc. issued an obligation to depositors who agree to pay ten (10) percent failsafe for one year. With the funds it acquires, The Bank of Willaine, Inc. can invest in different financial assets like in the stock market. What is the risk if the bank uses the funds it acquired from the depositors to invest in common stock? What liability type does the bank has by issuing that obligation?
The Corporate Treasurer of LetsDoIt Ltd, a company based in Mexico plans to borrow MXN 500 million pesos in 3 months’ time for a period of 3 months at the base rate plus 50 basis points. A lot of speculation is going on regarding a potential change in the government and interest rates have since been quite volatile.The Corporate Treasurer had recently attended a professional workshop on interest rate risk management where he had learnt about interest rate collars and interest rate guarantees, among others. He has been requested by the Board of Directors to make a presentation on the two financial instruments. Elaborate on the main points that are expected to be included in the presentation.
Company Treasurer Askabak expects to receive a cash inflow of $ 15,000,000 within 90 days. The Treasurer expects short-term interest rates to fall over the next 90 days. To hedge against this risk, the Treasurer decides to use an FRA that expires in 90 days and is based on 90-day LIBOR. FRA is quoted at 5 percent. At the end of the term, LIBOR is 4.5 percent. Assume the notional principal for the contract is $ 15,000,000. 1.Calculate the profit or loss for company A as a result of joining the FRA. 2. Using appropriate terminology, define the FRA type used here. 3. Indicate whether the treasurer should enter a long or short position to hedge the interest rate risk.
A business plans to borrow approximately $40 million in short-term funding through the issue of commercial paper in three months’ time. The business does not have a view on what is likely to happen to interest rates over the next three months, but it would be very satisfied if it could obtain its funding at the current yield. Using the following data, show how 90-day bank-accepted bills futures contracts can be used to hedge the interest rate risk to which the business is exposed. Show the calculation and timing of all transactions and cash flows (ignore transaction costs and marginrequirements). Today’s data: current commercial paper yields 6.00 per cent perannum 90-day bank-accepted bills futures contract 93.75. Data in threemonths: commercial paper yields 7.00 per cent perannum 90-day bank-accepted bills futures contract93.25.
A Treasurer buys a 6-month CD issued by a top-class bank with a tenor of 180 days at a yield of 16%. The face value at issue is GH¢10m. In 90-days time the buyer sells the CD when the 3-month secondary market for CDs issued in the names of top-class banks is 40/14.50. The buyer has held the CD for 90days, but now wants his cash back. What is the return on the investment for the Treasurer? Prepare a Cash forecast for the below information The sales and purchases for Ahemba Ltd are as follows: Month April May June Credit Sales $160,000 $140,000 $192,000 Credit Purchase $ 68,000 $64,000 $80,000 The company will pay wages of $8,000, $7,000 and $8,400 in April, May and June respectively. Interest payments are 3,000 per month during the period. The company will purchase equipment costing $50,000 and $4,000 in June. Ahemba Ltd estimates that 10% of its sales will be collected in the…
The XYZ customer service branch maintains a disbursement account which is funded by the main office. The branch needs funds for daily disbursements of P40,000 and a minimum balance of P20,000. The cost to transfer funds from the main office to the branch averages P300. The return on money marketable securities is 5%. XYZ Corporation agreed with its major supplier a credit term of 3/30, n/75. Using 360 days in a year, what would the compound annualize cost of this payable?
Oldhat Financial starts its first day of operations with â$12 million in capital. A total of â$140 million in checkable deposits are received. The bank makes a â$25 million commercial loan and another â$60 million inâ mortgages, with the followingâ terms: 200 standard 30â-year, âfixed-rate mortgages with a nominal annual rate ofâ 5.25%, each for â$300, 000. Assume that required reserves are 8â%.(a) What does the bank balance sheet look like?(b) How well capitalized is the bank?
The Thailand Plettery Steel Company has a debt of nzd 100,000, which isrepayable in twelve months. Plettery’s controller Jane Due is having troublesleeping at night knowing that the debt is unhedged. The current thb/nzdexchange rate is 20, and p.a. interest rates are 21 percent on thb and 10 percent on nzd. Jane is considering a forward hedge (at Ft,T = 20 × 1.21/1.10 = 22), but a friend tells her that he recently bought a call on nzd 100,000 with X = 20, and is willing to sell it to her at the historic cost, thb 1 per nzd or thb 100,000 for the total contract. What should she do?
In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. • A commercial bank plans to issue CDs in three months. • An insurance company plans to buy bonds in two months. • A thrift is going to sell Treasury securities it holds in its investment portfolio next month. • A U.S. bank lends to a French company: the loan is payable in euros. • A finance company has assets with a duration of six years and liabilities with a duration of 13 years.
A Bank has the following balance sheet (in millions), with the risk weights in parentheses. In addition, the bank has $30 million in commercial direct-credit substitute standby letters of credit to a public corporation and $30 million in 10-year FX forward contracts that are in the money by $2 million. a. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel III? (I have this answer which should follow into question B) Cash = $19 x 0% = 0 Mortgage Loan = $65 x 50% = $32.50 Consumer Loans = $155 x 100% = $155 Therefore, the Total Risk-Adjusted On-Balance Sheet Assets is $187.50. (Unless you suggest to round to $188 for below calculations please let me know) b. What are the: Common Equity Tier I (CET1) Risk-Based Capital Ratio Tier I Risk-Based Capital Ratio The Total Risk–Based Capital Ratio? *PLEASE HELP WITH B!!! Confused with which numbers on the balance sheet to include in the Common Equity Tier 1 Capital (CET 1), Additional Tier…
As corporate treasurer, you will purchase K1 million of bonds for the sinking fund in three months you believe rates will soon fall and would like to repurchase the company’s sinking fund bonds, which currently are selling below par, in advance of requirements. Unfortunately, you have to obtain approval from the board of directors for such a purchase, and this could take up to two months. What action can you take in the futures market to hedge any adverse movements in bond yields and prices until you actually can buy the bonds? Will you be long, or short? Why?
While reviewing the March 31, 2020, balance sheet of Business Solutions, Santana Rey notes that the business has built a large cash balance of $68,057. Its most recent bank money market statement shows that the funds are earning an annualized return of 0.75%. S. Rey decides to make several investments with the desire to earn a higher return on the idle cash balance. Accordingly, in April 2020, Business Solutions makes the following investments in trading securities. Apr. 16 Purchases Johnson & Johnson bonds for $10,000. Apr. 30 Purchases Starbucks notes for $4,400. On June 30, 2020, the fair value of the Johnson & Johnson bonds is $12,000 and the Starbucks notes is $3,800. Required 1. Prepare journal entries to record the April purchases of trading securities by Business Solutions. 2. On June 30, 2020, prepare the adjusting entry to record any necessary fair value adjustment to its portfolio of trading securities.