60.1K

Verified Solution

Link Copied!

Euromarket investment and fund raisingA U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars):

Mexico:$86 million excess cash to be invested (lent)

Japan: $68 million funds to be raised (borrowed)

Determine the effective interest rates for all three currencies in both the Euromarket and the domestic market; then indicate where the funds should be invested and raised.

(Note:Assume that because of local regulations, a subsidiary is not permitted to use the domestic market of any other subsidiary.)

The management gathered the following data:

		Currency
Item	U.S.	MP	Yen
Spot exchange rate		MP 11.58/U.S. $	108,34/U.S.$
Forecast percentage change		-3.05%	+1.53%
Interest rates
Nominal
Euro-market	3.99%	6.19%	2.04%
Domestic	3.73%	5.87%	2.11%
Effective
Euro-market	?	?	?
Domestic	?	?	?

(Note: Assume that because of local regulations, a subsidiary is not permitted to use the domestic market of any other subsidiary.)

The effective interest rate in the Euro-market for U.S. is ? %.

Answer & Explanation Solved by verified expert

See Answer