CONNECT 1 SEMESTER ACCESS CARD FOR CORPORATE FINANCE
11th Edition
ISBN: 9781259298738
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 31, Problem 7QP
Interest Rates and Arbitrage The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .17 percent per month. The interest rate in Great Britain is .61 percent per month. The spot exchange rate is £.64, and the three-month forward rate is £.65. Ignoring transaction costs, in which country would the treasurer want to invest the company’s funds? Why?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The treasurer of a major U.S. firm has $31276878 to invest for three months. The annual interest rate in the United States is 0.35% per month. The interest rate in Great Britain is 0.59% per month. The spot exchange rate is £0.72, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.?
NOTE: Enter the number rounding to four decimal places
The treasurer of a major U.S. firm has $43,129,609 to invest for three months. The annual interest rate in the United States is 0.37% per month. The interest rate in Great Britain is 0.56% per month. The spot exchange rate is £0.7, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.?
EUROCREDIT LOAN:A Swiss sporting goods company borrows in yen in the Eurocredit market at a rate of 4.94 percent from Bank of America using a three-month rollover loan. Bank of America assigns a default risk premium of 1.93 percent on the loan, and the country risk is an additional 0.76 percent. The bank can borrow funds in the Euromarket at the three-month LIBOR rate of 0.30 percent. What is Bank of America’s gross profit margin on this loan?
Chapter 31 Solutions
CONNECT 1 SEMESTER ACCESS CARD FOR CORPORATE FINANCE
Ch. 31 - Spot and Forward Rates Suppose the exchange rate...Ch. 31 - Prob. 2CQCh. 31 - Prob. 3CQCh. 31 - Prob. 4CQCh. 31 - International Risks At one point, Duracell...Ch. 31 - Multinational Corporations Given that many...Ch. 31 - Prob. 7CQCh. 31 - Exchange Rate Movements Some countries encourage...Ch. 31 - Prob. 9CQCh. 31 - Exchange Rate Risk If you are an exporter who must...
Ch. 31 - International Capital Budgeting Suppose it is your...Ch. 31 - International Capital Budgeting An investment in a...Ch. 31 - International Borrowing If a U.S. firm raises...Ch. 31 - International Investment If financial markets arc...Ch. 31 - Using Exchange Rates Take a look back at Figure 3...Ch. 31 - Prob. 2QPCh. 31 - Prob. 3QPCh. 31 - Using Spot and Forward Exchange Rates Suppose the...Ch. 31 - Prob. 5QPCh. 31 - Prob. 6QPCh. 31 - Interest Rates and Arbitrage The treasurer of a...Ch. 31 - Inflation and Exchange Rates Suppose the current...Ch. 31 - Exchange Rate Risk Suppose your company imports...Ch. 31 - Prob. 10QPCh. 31 - The International Fisher Effect You observe that...Ch. 31 - Prob. 12QPCh. 31 - Prob. 13QPCh. 31 - Capital Budgeting Lakonishok Equipment has an...Ch. 31 - Capital Budgeting You are evaluating a proposed...Ch. 31 - Prob. 16QPCh. 31 - Prob. 17QPCh. 31 - Using the Exact International Fisher Effect From...Ch. 31 - Prob. 1MCCh. 31 - What will happen to the companys profits if the...Ch. 31 - Ignoring taxes, what are East Coast Yachts...Ch. 31 - How can the company hedge its exchange rate risk?...Ch. 31 - Taking all factors into account, should the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- FOREIGN INVESTMENT ANALYSIS After all foreign and U.S. taxes, a U.S. corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be 1.30 per pound, and the pound is expected to depreciate 5% against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 10% a year indefinitely. The parent U.S. corporation owns 10 million shares of the subsidiary. What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 11% for the subsidiary.arrow_forwardA U.S. company can borrow 10,000 pounds in Great Britain for 6% interest, paying back 10,600 pounds in one year. Alternatively, the U.S. company can borrow an equivalent amount of U.S dollars in the United States and pay 13% interest. Assuming capital markets are efficient, estimate the expected inflation rate in the United States if inflation in Great Britain is expected to be zero.arrow_forwardDuPont'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?arrow_forward
- Consider the currency risk faced by Walt Disney Company (DIS), which generates revenues from all over the world. One of its biggest sources of income is Tokyo Disney. The firm expected to receive ¥500 mln from its Tokyo operation in three months and another ¥500 min in six months. It would like to lock in the exchange rate on these two cash flows and thereby eliminate the risk of an unfavorable move in exchange rates. The investment banker indicates that the three-month forward $/ rate is 0.009123. The investment banker also offers a six-months forward contract at a rate 0.009178 $/¥. What hedging strategy Disney will take? How much home currency will the company receive from its operation in Tokyo in six months?arrow_forwardConsider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a decline in the value of the Swiss franc over the next three months. The U.S. risk-free rate is 2.9 percent, and the Swiss risk-free rate is 0.9 percent. Assume that interest rates are expected to remain fixed over the near future. The current USD/CHF rate is 1.1059. Calculate the price at which the U.S. Company could enter into a forward USD/CHF contract that expires in 90 days (X.XXXXarrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License