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Given the spot and two-year forward rates for the British pound are $2.00 and $1.95, respectively and are $1.40 and $1.42 per euro, respectively. Given that
interest rates are 6 percent in the U.S., 8 percent in U.K., and 5 percent in
Germany.
Determine which country can generate the best return on a covered
two-years investment. Assume a $200,000 investment value.
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- You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 16 million. The cash flows from the project would be SF 4.5 million per year for the next five years. The dollar required return is 13 percent per year, and the current exchange rate is SF 1.10. The going rate on Eurodollars is 4 percent per year. It is 2 percent per year on Swiss francs. a. Convert the projected franc flows into dollar flows and calculate the NPV. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. What is the required return on franc flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-2. What is the NPV of the project in Swiss francs? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g.,…An American firm wants to borrow 100 million USD for 1 year to fund a capital investment project. The firm can borrow the money from a U.S. bank at an interest rate of 6%. Alternatively, the firm could borrow British pounds at a rate of 3% a year. At the end of the year, the firm would pay back the loan and interest. The initial exchange rate is 1 GBP = 2 USD. If at the end of the year the exchange rate changes from 1 GBP = 2 USD to 1 GBP = 3 USD, what was the actual cost of borrowing (effective interest rate) if the American firm chose to obtain the loan in British pounds?Currently, the spot rate is RM4.2000/USD and the one year forward rate is RM4.1000/USD. Interest rate in United States is 3% per annum and in Malaysia is 2% per annum. Assume that you can borrow as much as USD100,000 or RM420,000 for your coming project. If Interest Rate Parity (IRP) is not holding, determine how would you carry out covered interest arbitrage (CIA) and compute the profit.
- You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 13.8 million. The cash flows from the project would be SF 4.1 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.12. The going rate on Eurodollars is 5 percent per year. It is 4 percent per year on Euroswiss. a. Convert the projected franc flows into dollar flows and calculate the NPV. (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. What is the required return on franc flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-2. What is the NPV of the project in Swiss francs? (Do not round intermediate enter your answer in francs, not in millions, rounded to 2 calculations and decimal places, e.g., 1,234,567.89.) b-3.…You have $ 10 million to invest. If you invest the money in the US for six months, you can earn 2%/year. Alternatively, you can invest in Switzerland and earn 4%/year. The spot exchange rate is CHF 0.9188/$. The forward exchange rate for delivery six months hence is CHF 0.9188/$. Which method of investing do you prefer and what will be the value of your investment at maturity? Assume no transaction cost. O Invest in the US; $10,373,610 Invest in Switzerland; $10,202,013 O None of these O Invest in Switzerland; CHF 10,373,610 O Invest in the US; $10,100,502Assume the spot rate between the uk and the US is .€ .6789= $1 while the one year Foward rate is €.6782=$1. The risk free rate in the UK is 3.1 percent. The risk free rate in the U.S is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest abitrage?
- One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Germany. The spot exchange rate for the US dollar is $1.50 to the EURO. The 12-month forward rate is $1.55.i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above. Start with a borrowing amount and then explain and calculate the gain/loss with the rates that you will borrow and deposit.ii) Will the situation persist forever? Explain your answer.A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one year forward rate is $2.02/GBP. The U.S. one year interest rate is 14% and the one year British interest rate is 12%. Determine if there is a covered interest rate arbitrage opportunity, and if so, clearly show each step involved in the arbitrage opportunity. Show the total dollar profit. If you determined that there is no arbitrage opportunity, describe why you made that decision.A company is considering an investment project in Canada which has an initial cost of CAD5,785,000. The project is expected to return a one-time payment of CAD7,430,000 two years from now. The risk-free rate of return is 1.6 percent in the U.S. and 1.9 percent in Canada. The inflation rate is 1.5 percent in the U.S. and 1.8 percent in Canada. Currently, you can buy CAD 124.20 for $100. How much will the payment two years from now be worth in U.S. dollars? $5,917,265 $5,956,317 $5,927,028 $5,946,554 $5,936,791
- Suppose the annual interest rates in the U.S. (home nation) and the U.K (foreign nation) are 8% and 6%, respectively. A U.K. interest arbitrager decides to invest £10,000 in the U.S for three months. Given that the current spot rate is $2 per pound, calculate the EUD from investing in the U.S., assuming that on the maturity date the U.S. dollar is expected to depreciate by 1%. Interpret your result.Suppose that the exchange rate is $0.92/Euro. The dollar-denominatedinterest rate is 4% and the euro-denominated interest rate is 3%.u = 1.2, d = 0.9, T = 0.75, n = 3, and K = $1.00.a. What is the price of a 9-month European put?b. What is the price of a 9-month American put?Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.77 and Kr 5.92, respectively. The annual risk-free rate in the United States is 3.57 percent, and the annual risk-free rate in Norway is 5.27 percent. What would the six-month forward rate need to be on the Norweigan krone to prevent arbitrage?