2. Covered Interest Arbitrage. Assume the following information:

Spot rate of Mexican peso = $.100 180day forward rate of Mexican peso = $.099 180day Mexican interest rate = 6% 180day U.S. interest rate = 4% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer. Assume you have 1,000,000 Pesos to invest (MXP). SHOW WORK

a.	is political risk.
b.	is financial risk.
c.	is the probability of a host government takeover.
d.	may often vary with the country of concern.

17. __________________ can be defined as capitalizing on a discrepancy in quoted prices be making a riskless profit (fill-in)

18. True or False. Financial institutions often use swaps to change either currency or interest rate exposure. For example, it is normal for institutions to trade a floating interest rate loan for a fixed loan.

19. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:

a.	the cost of borrowing funds in the U.K.
b.	the economic conditions in the U.K.
c.	the parent's cost of capital.
d.	a. and b.

20. True or False. Due to more available capital, an MNC will most always have a lower cost of debt than their domestic counterparts cost of debt.

21. An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary's ability to generate sufficient sales there. The country risk characteristic that would best address this concern is:

a.	the host government's tax rates charged on remitted earnings.
b.	the possibility of blocked funds.
c.	the state of the economy in Germany.
d.	the possibility of a withholding tax imposed by the German government.

22. MNCs often use debt financing to match foreign currency inflows (revenue) in order to reduce currency risk. Which of the following are effective methods to do so:

a. issue bonds in the foreign currency

b. using a parallel loan

c. using a currency swap.

d. all the above.

e. a. and c. only