Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The interest rate is 12 percent per annum in the United States and 11 percent per annum in Germany. Currently, the spot exchange rate is €1.05 per dollar and the six-month forward exchange rate is €1.03 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return?

(C) US Bank is considering investing in a three years' project in Europe country. The project would require an initial investment of $750,000 and it is expected to generate €80,000, €100,000 and €150,000 in year one until three, respectively. The business risk will be identical to the firm's existing line of business in the euro-zone, the required rate of return in the euro-zone is 18 percent. The exchange rate is $1.20/€ where the dollar also shows appreciating by one percent for every year. Determine the Net Present Value (NPV) in dollar currency for this project and justify.

Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm.  The finance manager expects the spot price   of the € to remain stable at the current rate of $1.60/€.  But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low         as $1.50/€.  Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures.  Six months Call and Put options with an exercise price of $1.60/€ are available.  The Call sells for $.08/€ and the Put sells for $.04/€.  A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment?  Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used?  assume…

The treasurer of a major U.S. firm has $38 million to invest for three months. The interest rate in the United States is .55 percent per month. The interest rate in Great Britain is .59 percent per month. The spot exchange rate is £.76, and the three-month forward rate is £77. Ignore transaction costs. a. If the treasurer invested the company's funds in the U.S., how much would the investment be worth after three months? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. b. If the treasurer invested the company's funds in Great Britain, how much would the investment be worth after three months in U.S. dollars? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. a. U.S. investment b. Great Britain investment

Suppose the quotes for currencies in the three money centers are given as follows: At London center: 1GBP = 150 JPY At Tokyo center: 1USD = 115 JPY At New York center: 1USD = 0.86GBP An investor has 100,000 USD. Is there any opportunity for arbitrage? If yes, explain how does the investor use arbitrage to take advantage of these data? And how much could he or she earn from this?

Suppose you are working for a company based in Ireland (where the euro is used). This company exports product to the UK, but invoices its prices in euros (instead of pounds). Suppose you believe the euro will appreciate versus the pound over the coming year. Would that impact the profitability of your company this year? If not, explain. If so, explain how (and the type of risk you’re facing.

Lakonishok Equipment has an investment opportunity in Europe. The project costs €18,406,730 and is expected to produce cash flows of €3,681,369 in Year 1, €4,992,682 in Year 2, and €6,337,782 in Year 3. The current spot exchange rate is $1.23/€ and the current risk-free rate in the United States is 3.71%, compared to that in Europe of 3.03%. The appropriate discount rate for the project is estimated to be 10.55%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €12,529,609. What is the NPV of the project?

Suppose that the First United Bank of America has two loans. Each is due to be repaid one period hence and has independent and identically distributed cash flows. Each loan will repay $300 with a probability of 0.8 and $150 with a probability of 0.2. However, while the bank knows this, the investors cannot distinguish this loan from that of the Third TransAmerica Bank, which has the same number of loans, but will pay $300 with a probability of 0.5 and $150 with a probability of 0.5. There is a prior belief of 0.5 that the First United Bank of America has the higher-valued portfolio. Suppose that the First United wished to securitize these loans, and if it does so without a credit enhancement, the cost of communicating the true value is 7.5% of the true value. Assume that the discount rate is zero and that everybody is risk-neutral. Consider the following securitization scenario. The First United can create two classes of bondholders in a senior- subordinated structure or junior-senior…

Lakonishok Equipment has an investment opportunity in Europe. The project costs €20,065,563 and is expected to produce cash flows of €3,524,370 in Year 1, €4,549,121 in Year 2, and €5,590,740 in Year 3. The current spot exchange rate is $1.38/€ and the current risk-free rate in the United States is 3%, compared to that in Europe of 3.08%. The appropriate discount rate for the project is estimated to be 11.07%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €13,733,917. What is the NPV of the project?

James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate Six-month forward exchange rate Dollar interest rate Swiss franc interest rate a. Is the interest rate parity holding? You may ignore transaction costs. Yes Ο NO SFrl.2066/$ SFr1.1937/$ 2.50% per year 2.00% per year Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.06 per dollar and the six-month forward exchange rate is €1.04 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return? Better investment