跨国公司财务管理基础（2）TEXAS TECH UNIVERSITY SECOND SUMMER 2012 RAWLS COLLEGE OF BUSINESSAREA OF FINANCEFIN 4328 – 001– 62167 – International FinanceDr. Dan??o?luHomework #2Due on Thursday, July 26, 20121. The inflation rate in Great Britain is expected to be 4% per year, and the inflation rate in France is expected to be 6% per year. If the current spot rate is ￡1 = FF 12.50, what is the expected spot rate in two years?Based on PPP, the expected value of the pound in two years is 12.5 x (1.06/1.04)2 = FF12.99.2. During 2001, the US dollar exchange rate changed from $ 0.5592 / Australian$ to $ 0.5117 / Australian$. During the same year, US inflation was 1.58% and the Australian inflation was 2.87%.a. By how much did the nominal value of the dollar change during 2001?Since the question asks about the change in the value of the dollar during 2001, first we need to find the value of the US dollar at the beginning and at the end of the year:Beginning : 1 $ = (1 / 0.5592) Australian$ = 1.7883 Australian$Ending : 1 $ = (1 / 0.5117) Australian$ = 1.9543 Australian$Change in the nominal value of the dollar = (1.9543 / 1.7883) — 1 = 0.0928 = 9.28%. The dollar appreciated by 9.28% in nominal terms during 2001.b. By how much did the real value of the dollar change during 2001?We need to subtract or discount the effect of inflation differential from the ending exchange rate:real exchange rate = nominal exchange rate x [(1+i f) / (1+i h)]real exchange rate = 1.9543 x [(1+0.0158) / (1+0.0287)] = Australian$1.9298 / $Change in the real value of the dollar = (1.9298 / 1.7883) — 1 = 0.079 = 7.9%. The dollar appreciated by 7.9% in real terms during 2001.3. Suppose the spot quote on the euro is $0.9302-18, and the spot quote on the Swiss franc is $0.6180-90.a. Compute the percentage bid-ask spreads on the euro and franc.The percentage bid-ask spreads on the euro and franc are calculated as follows:Euro bid-ask spread = (0.9318 - 0.9302)/0.9318 = 0.17%SFr bid-ask spread = (0.6190 - 0.6180)/0.6190 = 0.16%b. What is the direct spot quote for the franc in Frankfurt?In order to sell one franc for euros, first sell the franc for $0.6180 and then convert $0.6180 into euros at the ask rate of $0.9318. Thus the bid rate for the franc is 0.6180/0.9318 = €0.6632. Similarly, to acquire one franc, sell euros for dollars and then sell dollars for francs. Specifically, it costs $0.6190 to buy €1. Because €1 can be converted into $0.9302, it takes€0.6190/0.9302 = €0.6654 to buy $0.6190. Thus the ask rate for francs is €0.6654. The bid-ask quote on the franc in Frankfurt is therefore €0.6632-54.4. If the Swiss franc is $0.68 on the spot market and the 180-day forward rate is $0.70, what is the annualized interest rate in the United States over the next six months? The annualized interest rate in Switzerland is 2%.According to interest rate parity,(1 + r us)/(1 + r sw) = f1/e0where f1 and e0 are the SFr forward and spot rates. Substituting in the numbers and recalling that everything must be converted to a semi-annual basis, we have (1 + 0.5r us)/1.01 = 0.70/0.68, or (1 + 0.5r us)= 1.0397. The solution is r us = 7.94%.5. Suppose that you have the following information on hand for US dollars and Norwegian krone:a. Is there an arbitrage opportunity? Where would you borrow? Where would you invest?(1 + r us)/(1 + r sw) = f1/e0(1 + (0.0445/4)) ?=? (1 + (0.05/4)) (6.0186 / 6.0312)1.011125 ?=? 1.01038475 No arbitrage opportunity if we borrow krones and invest dollars.(1 + (0.05/4)) ?=? (1 + (0.0445/4)) (1/6.0186 / 1/6.0312)1.0125 ?=? 1.0132418 There is an arbitrage opportunity if we borrow dollars and invest krones.b. If your answer to part (a) is yes, then calculate the arbitrage profit and show all the transaction flows.Borrow $1,000,000 for 90 days at the rate of 5%/4=1. 25%:Will owe $1,000,000 x 1.0125 = $1,012,500 at the end of 90 days.Sell $1,000,000 and buy krones in the spot market at the spot rate of NK6.0312/$:Receive $1,000,000 x KR6.0312/$ = KR6,031,200Invest KR6,031,200 for 90 days at the rate of 4.45%/4=1.1125%:Will receive KR6,031,200 x 1.011125 = KR6,098,297 in 90 daysSell KR6,098,297 and buy dollars in the forwars market at the forward rate of NK6.0186/$:Will receive KR6,098,297 / KR6.0186/$ = $1,013,241.8Arbitrage profit = $1,013,241.8 - $1,012,500 = $7416. The following exchange rate quotes are observed in the market:New York: ￥92/$Zurich: SF1.02/$Tokyo: ￥90/SFAssume you have an initial SF12,000,000. Determine if you can make a profit via triangular arbitrage, and, if so, show the steps and calculate the amount of profit in Swiss francs.Route 1:Sell SFr12,000,000 in Tokyo and buy ￥90/SF x SF12,000,000 = ￥1,080,000,000Sell ￥1,080,000,000 in New York and buy ￥1,080,000,000 / ￥92/$ = $11,739,130.43Sell $11,739,130.43 in Zurich and buy $11,739,130.43 x SF1.02/$ = SF11,973,913.04No arbitrage opportunity.Route 2:Sell $1 in New York and buy ￥92/$ x $1 = ￥92Sell ￥92 in Tokyo and buy ￥92 / ￥90/SF = SF1.0222Sell SF1.0222 in Zurich and buy SF1.0222/SF1.02/$ = $1.002There is an arbitrage opportunity of $0.002 per $1.Route 3:Sell SF12,000,000 in Zurich and buy SF12,000,000 / SF1.02/$ = $11,764,705.88Sell $11,764,705.88 in New York and buy $11,764,705.88 x ￥92/$ = ￥1,082,352,941Sell ￥1,082,352,941 in Tokyo and buy ￥1,082,352,941 / ￥90/SF = SF12,026,143.79There is an arbitrage opportunity of SF26,143.79 per SF12,000,000.7. During the year, Japan had a current-account surplus of $98 billion and a financial-account deficit of $67 billion.a. Assuming the preceding data are measured with precision, what can you conclude about the change in Japan'sforeign exchange reserves during the year?The sum of the current-account and capital-account balances, or $31 billion, must equal the official-reserves balance. Since this figure is positive, it indicates that Japanese official reserves increased by $31 billion.b. What is the gap between Japan's national expenditure and its national income?The current-account balance equals the difference between national income and national expenditure. In Japan's case, this identity means the income-expenditure gap is $98 billion; that is, Japan's national income exceeds its spending by the equivalent of $98 billion.c. What is the gap between Japan's savings and its domestic investment?Since (national savings —domestic investment) equals (national income —national expenditure), the answer here is the same as the answer to part b.d. What was Japan's net foreign investment for the year?Japan's net foreign investment equals national savings minus domestic investment or $98 billion.e. Suppose the Japanese government's budget ran a $22 billion surplus during the year. What can you concludeabout Japan's private savings-investment balance for the year?The sum of the (private savings—investment) balance and the (public sector surplus or deficit) must equal the (national savings—investment) balance. With a government surplus of $22 billion and an overall savings—investment balance of $98 billion, the private sector savings—investment balance must equal $76 billion.8.You plan to take a winter vacation in Germany one year from now. Since you are going to be large group, you are currently negotiating the rental price of a mountain lodge that will be exclusively open to your group. The lodge’s owner say s that he wants to protect his real income against both inflation and exchange rate changes. His current price is €9,800 per week. He plans to adjust this price upward or downward for the inflation rate in Germany between now and one year later.When you are preparing the budget for this vacation, you are basing your calculations on the purchasing power parity. By using the following information, calculate the rental price you should include in your budget for a one-week rental next year.The price per week at the end of the year is going to be €9,800 x 1.035 = €10,143.The exchange rate at the end of the year, according to the PPP, is going to be $1.3620/€ x (1.025/1.035) = $1.3488/€.Therefore, the dollar price of the lodge at the end of the year is going to be €10,143 x $1.3488/€ = $13,681.9. The following interest and exchange rates are observed in the market:Using the information provided in the table, determine whether there are any opportunities for a covered interest arbitrage. If so, show the steps and calculate the amount of profit for 1,000,000 of the currency in which you borrow.Borrow SFr and invest in $:(1 + (0.0320/4)) ?=? (1 + (0.0475/4)) x (1.2740 / 1.2845)1.0080 ?=? 1.0036There is no arbitrage opportunity because borrowing costs more than the investment returns.Borrow $ and invest in SFr:(1 + (0.0480/4)) ?=? (1 + (0.0312/4)) x (1.2785 / 1.2810)1.012000 ?=? 1.005833There is no arbitrage opportunity because borrowing costs more than the investment returns.。
