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Exercise Chap 5

The document contains 6 exercises involving currency exchange rates and calculations to determine the most profitable currency for international loans and investments. Exercise 1 asks the investor to calculate the rate of return for investing in stocks when buying, holding, and selling involve currency exchange and fees. Exercise 2 provides stock price information in EUR and asks which currency is preferable and the benefit amount. Exercises 3-6 involve determining the most profitable currency for a company or multinational corporation to take out loans based on interest rates and expected future currency exchange rates.

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239 views

Exercise Chap 5

The document contains 6 exercises involving currency exchange rates and calculations to determine the most profitable currency for international loans and investments. Exercise 1 asks the investor to calculate the rate of return for investing in stocks when buying, holding, and selling involve currency exchange and fees. Exercise 2 provides stock price information in EUR and asks which currency is preferable and the benefit amount. Exercises 3-6 involve determining the most profitable currency for a company or multinational corporation to take out loans based on interest rates and expected future currency exchange rates.

Uploaded by

Lê Hồng Thuỷ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EXERCISES

1. At beginning of 200x, an investor (who is having GBP) considers to buy 10,000


stocks. Current price of this stock is US$5 per stock and fee when buying is
US$0.4 per stock. Currently, GBP/USD exchange rate is 1.0522/42. It is expected
that, at the end of this year, the investor will receive US$1.2 interest payment per
stock. The stock will be sold out at US$6 per stock and selling fee is US$0.2 per
stock. GBP/USD exchange rate at the end of the year is 1.6255/75. How much is
rate of return if the investor decide to invest in this stock?
2. There are information about a stock transacted in international stock market.

1/1/N 31/12/N
Stock price (EUR) 135 160.5

a. Which currency is preferable? How much does investor benefit when selecting
that currency instead of the other currency ?
b. How much does Et fluctuate so that investing by USD is more beneficial than by
EUR?

3. A company needs to borrow US$10 mil with 1 year maturity. This company
considers which currency should be borrowed. USD interest rate is 8%/year, EUR
interest rate is 6%/year and JPY interest rate is 3%/year. It is expected that EUR
will be increased from 1EUR = 1.1USD at present to 1EUR = 1.15 USD at
maturity and JPY will be increased from 120JPY/USD at present to 115JPY/USD
at maturity. Which currency should the company borrow?
4. A multinational corporation (MNC), is seeking a USD 10 millions loan for setting
up its new branches worldwide. There are some information found:
- USD loan is offered at 8.0%.
- GBP loan is offered at 10%
- SGD loan is offered at 6.0%.
- HKD loan is offered at 5.0%.
- JPY loan is offer at 3.0%.

Providing that spot rates that prevails at the transaction time in the market are: USD/GBP
= 0.6; USD/JPY = 125; USD/SGD = 1.76; USD/HKD = 7.74; future spot rate at maturity will
be: USD/GBP = 0.58; USD/JPY = 132; USD/SGD = 1.78; USD/HKD = 7.8

a. Which loan is preferable? why?


b. How much does the customer benefit when selecting that currency instead of
others?

5. A multinational corporation (MNC), is seeking a USD 10 millions loan for


setting up its new branches worldwide. There are some information found:

- USD loan is offered at 7%-8%.


- GBP loan is offered at 9%-10%
- SGD loan is offered at 5%-6.0%.
- HKD loan is offered at 4%-5.0%.
- JPY loan is offer at 2%-3.0%.

Providing that spot rates that prevails at the transaction time in the market are:
USD/GBP = 0.60/0.65; USD/JPY = 120/125; USD/SGD = 1.72/1.76; USD/HKD =
7.65/7.74; future spot rate at maturity will be: USD/GBP = 0.50/0.58; USD/JPY =
130/135; USD/SGD = 1.78/1.85; USD/HKD = 7.80/7.88

a. Which loan is preferable? why?


b. How much does the customer benefit when selecting that currency instead of
others?

5. Two affiliates of a MNC locate in countries A and B. Affiliate in A sold 450,000


products (X) to B at 20 USD/ unit. B then sold those 150,000 products out at 26
USD/unit. The remaining products were developed by B into Y (1X into 1Y) and
sold out at 30 USD/unit.
Cost of good sold per unit in A was 12 USD. Processing cost to develop X into Y
per unit in B was 8 USD. Other expenses per unit in A, and B were 1.5 and 2.0
respectively. Corporate tax rate in A and B was 25% and 30% respectively.
a. Define increased profit (or decreased profit) of the whole MNC if A sold those
above products for B at 24 USD per unit.
b. In order to benefit more 15% than MNC’s net income in question a, how much
is transfer price between A and B? (supposing that other factors unchanged)

6. Two affiliates of a MNC locate in countries A and B. Affiliate in A sold 350,000


products (X) to B at 20 USD/ unit. B then sold those 150,000 products out at 26
USD/unit. The remaining products were developed by B into Y (1X into 1Y) and
sold out at 33 USD/unit.
Cost of good sold per unit in A was 12 USD. Processing cost to develop X into Y
per unit in B was 8 USD. Other expenses per unit in A, and B were 1.5 and 2.0
respectively. Corporate tax rate in A and B was 23% and 30% respectively.
a. Define increased profit (or decreased profit) of the whole MNC if A sold those
above products for B at 24 USD per unit.
b. In order to benefit more 10% than MNC’s net income in question a, how much
is transfer price between A and B? (supposing that other factors unchanged)

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