Multinational Finance, problem set - VI
Question 1
Norwegian firm needs NOK 10,000,000 for one year. It can borrow kroner in Oslo at 14%p.a. or dollars in London at
8%p.a. The spot exchange rate is NOK 6.7500/USD. At what forward rate the firm would be indifferent between where
it borrows?
Question 2
The U.S. firm wants to borrow USD 2,000,000 or the equivalent in foreign currency for one year. The following
alternatives are possible:
- Bank of America, dollars at 8%p.a.;
- National Westminster Bank, pounds at 14%p.a.;
- Sanwa Bank, yens at 5%p.a.
The pound is expected to depreciate against the dollar by 5% and the yen is expected to appreciate against the dollar by
3%. Corporate income taxes are 35% in the U.S., 36% in the U.K. and 40% in Japan. The company has no operations in
either the U.K. or Japan. What is projected after-tax cost of borrowing (in dollars) from each source? Which of the
alternatives would you recommend and why?
Question 3 (homework 5)
You have USD 1,000,000 that will be needed in three months to settle the payment. Till then you can invest the money
and gain the maximum profit. The following data are available:
- 3-month investment interest rate on zloty 24%p.a.
- 3-month investment interest rate on dollar 7.725%p.a.
- 3-month investment interest rate on euro 6.625%p.a.
- Spot exchange rates: PLN 3.5710/USD and PLN 2.1100/EUR
- 3-month forward exchange rates: PLN 3.5825/USD and PLN 2.1484/USD.
Which of the alternatives is worth consideration and why?
Question 4
Suppose that Polish affiliate of the British company has to borrow GBP 1,000,000 for a year and it considers issuing a
one-year pound-denominated bond at 6%p.a. with the expenses of the issue at 1%p.a. or issuing a zloty-denominated
bond with the same principal at 18%p.a. and 2% for expanses. The total cost of each alternative should be evaluated in
pounds. Actual spot exchange rate is PLN 6.5410/GBP.
a. Calculate zloty depreciation against pound at which the costs of the pound-denominated bond will equal the
costs of zloty-denominated bond.
b. Consider buying call option with strike price at PLN 7.0000/GBP to secure the pound-denominated contract.
At what option premium will this scenario make two alternative funds sources indifferent?