Chapter 21

Problems 1-18
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel. To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."

sis ToolPak"

Chapter 21
Question 1 Input Area:

a. Cash Euro value per $ b. $ value per euro c. Euro amount f. Pesos per $

$ $

100 1.5363 0.6509 5,000,000 10.3584

Output Area:

Euros 65.0915 One euro $ 1.5363 Dollar value $ 7,681,672 More worth New Zealand dollar More worth Mexican peso # of Pesos/Euro 15.9140 This is a cross rate. g. Most valuable = Kuwait Dinar = $3.7595 Least valuable = Vietnam dong = $0.00006020 a. b. c. d. e. f.

Chapter 21
Question 2 Input Area:

SF US dollars SF value per $ $ per

$ $

100 100 100 0.9531 1.9474

Output Area:

100, since 100, since (SF) Cross rate SF/ Cross rate /SF

$ 194.740 204.3227 2.0432 0.4894

Chapter 21
Question 3 Input Area:

Spot /$ rate 6 month /$ rate Spot $/C$ rate 3 month $/C$ rate

108.2100 106.9600 1.0292 1.0303

Output Area:

The yen is selling at a more expensive the spot market $0.0092413 The C$ is selling at a less expensive the spot market $0.9716284

premium because it is in the forward market than in versus $0.0093493

discount because it is in the forward market than in versus $0.9705911 fall rise

The value of the dollar will relative to the yen. The value of the dollar will relative to the Canadian dollar.

Chapter 21
Question 4 Input Area:

Spot exchange rate for C$ 6-month forward rate for C$ Price of beer in Canada

$ $ $

1.06 1.11 2.50

Output Area:

a. The U.S. dollar, since C$ =

0.9434

b. Price of beer in U.S. $ 2.3585 Among the reasons that absolute PPP doesn't hold are tariffs and other barriers to trade, transactions costs, taxes, and differential tastes. c. The U.S. dollar is selling at a premium because it is more expensive in the forward market than the spot market. d. The Canadian dollar is expected to depreciate in value relative to the dollar, because it takes more Canadian dollars to buy one U.S. dollar in the future than it does today. e. Interest rates in the U.S. are probably lower than they are in Canada.

Chapter 21
Question 5 Input Area:

Exchange rate for /$ Exchange rate for $/ b. Cross rate for /

112 1.93 209

Output Area:

a. Cross rate (/)

216.16

b. The yen is quoted too low relative to the pound. Take out a loan for $1 and buy yen 112.0000 Use the proceeds to purchase pounds at the cross rate: 0.535885 pounds Use the pounds to buy back dollars and repay the loan: $ 1.0343 Arbitrage profit $ 0.0343

Chapter 21
Question 6 Input Area:

Spot rate for U.K. (/$) Forward rate for Great Britian Spot rate for Japan (/$) Forward rate for Japan Spot rate for Switzerland (SFr/$) Forward rate for Switzerland U.S. risk-free rate

0.5135 0.5204 108.21 106.96 1.0492 1.0478 2.20%

Output Area:

Great Britian Japan Switzerland

3.54% 1.04% 2.07%

Chapter 21
Question 7 Input Area:

Amount invested Months to invest Monthly U.S. interest rate Monthly British interest rate Spot rate for Great Britain Forward rate for Great Britain

$30,000,000 3 0.37% 0.51% 0.55 0.56

Output Area:

U.S. Great Britain Invest in U.S.

$ 30,334,233.62 $ 29,917,392.29

Chapter 21
Question 8 Input Area:

Spot rate for Poland Expected rate Duration (years)

2.17 2.26 3.00

Output Area:

Relative PPP

1.36%

Inflation in Poland is expected to exceed that in the U.S. by 1.36% over this period.

Chapter 21
Question 9 Input Area:

Singapore $ Quantity Cost in Singapore $ # days until arrival Sales price Exchange rate change

1.3803 30,000 204.70 90 150.00 10%

Output Area:

No change in exchange rate If exchange rate rises by 10% If exchange rate falls 10% Break-even Decline of

$ $ $

50,967.18 455,424.71 (443,369.80) $1.3647 -1.13%

Chapter 21
Question 10 Input Area:

Spot on krone Forward on krone Risk-free rate (U.S.) Risk-free rate (Norway) Days for contract

5.15 5.22 3.8% 5.7% 180

Output Area:

a. If IRP holds, F180

5.1987

Since given F180 = 5.22 an arbitrage exists; the forward premium is too high. Borrow 1 krone today at 5.70% interest. Agree to a 180-day forward contract at 5.220 Convert the loan proceeds into dollars today for 0.19417 Invest these dollars at 3.80% ending up with 0.19778 Convert these dollars back to krone as 1.03241 Repay the loan, which costs 1.02771 ending with a profit of 0.00469 krone. b. F180 (Kr/$) 5.1987

Chapter 21
Question 11 Input Area:

Inflation (U.S.) T-bills Australian gov't securities Canadian gov't securities Tiawanese gov't securities

3.90% 5.80% 4.00% 7.00% 9.00%

Output Area:

Australian inflation Canadian inflation Tiawanese inflation

2.10% 5.10% 7.10%

Chapter 21
Question 12 Input Area:

Spot on yen Forward on yen Number of months

114.32 116.03 3

Output Area:

a. The yen is expected to get weaker since it will take more yen to buy one dollar in the future than it does today. b. hUS-hJapan 1.50% The approximate inflation differential between the U.S. and Japan is 6.12% annually.

Chapter 21
Question 13 Input Area:

Spot on HUF U.S. inflation rate Hungarian inflation rate # yrs to predict exchange rate

152.93 4.90% 8.60% 1 2 5

Output Area:

E[S1] (HUF) E[S2] (HUF) E[S5] (HUF) You are relying on relative PPP.

158.59 164.46 183.39

Chapter 21
Question 14 Input Area:

Project cost Year 1 cash flow Year 2 cash flow Year 3 cash flow Spot rate ($/) U.S.risk-free rate Euroland risk-free rate Cost of capital Sales price in three years

14,000,000 2,100,000 3,400,000 4,300,000 1.28 4.80% 4.10% 13.00% 9,600,000

Output Area:

E(S1) $/ E(S2) $/ E(S3) $/ Project cost in dollars Dollar value of CF in year 1 Dollar value of CF in year 2 Dollar value of CF in year 3 Dollar value of sales price in year 3 Total dollar value of year 3 CF NPV $ $ $ $ $ $ $

1.2886 1.2973 1.3060 17,920,000.00 2,706,074.93 4,410,725.12 5,615,779.98 12,537,555.31 18,153,335.30 510,173.30

Chapter 21
Question 14 Input Area:

Cost (SF) Cash flows (SF) Required return Current exchange rate Eurodollar rate Euroswiss rate

24,000,000 6,600,000 12% 1.090 8% 7%

Output Area:

a. Implicitly, it is assumed that interest rates won't change over the life of the project, but the exchange rate is projected to decline because the Euroswiss rate is lower than the Eurodollar rate. b. t 0 1 2 3 4 5 NPV c. R(SFr) NPV (SFr) NPV ($) SFr -24,000,000 6,600,000 6,600,000 6,600,000 6,600,000 6,600,000 E[St] 1.0900 1.0791 1.0683 1.0576 1.0470 1.0366 US$ $ (22,018,348.62) 6,116,207.95 6,177,987.83 6,240,391.75 6,303,426.01 6,367,096.98 $ 428,195.99 10.88% 466,733.63 428,195.99

Chapter 21
Question 16 Input Area:

Assets (solaris) Debt (solaris) Equity (solaris) Current exchange rate b. Exchange rate in one year c. Exchange rate in one year

23,000 9,000 14,000 1.20 1.40 1.12

Output Area:

a. Assets $ 19,166.67

Liabilities Equity Total liabilities & equity

b. Assets c. Assets $ 20,535.71 $ 16,428.57

Liabilities Equity Total liabilities & equity Liabilities Equity Total liabilities & equity

$ $

7,500.00 11,666.67 19,166.67

$ $ $ $

6,428.57 10,000.00 16,428.57 8,035.71 12,500.00 20,535.71

Chapter 21
Question 17 Input Area:

Assets (solaris) Debt (solaris) Equity (solaris) Retained earnings (solaris) Exchange rate

23,000 9,000 14,000 1,250 1.24

Output Area:

Assets

Balance Sheet (solaris) Liabilities Equity 24,250.00 Total liabilities & equity

Assets

Balance Sheet (dollars) Liabilities Equity 19,556.45 Total liabilities & equity

$ $

9,000.00 15,250.00 24,250.00

$ $

7,258.06 12,298.39 19,556.45

Chapter 21
Question 18 Input Area:

Cost () Cash flows () # of years Required return Current exchange rate Euro risk-free rate Dollar risk-free rate

2,000,000 900,000 3 10% 0.500 7% 5%

Output Area:

a. 1+ RUS = (1+ RUS)/(1+ hUS)=(1+ RFC)/(1+ hFC)=1+ RFC

t b. E[ST] = FT = S0 [(1+ RFC)/(1+ RUS)] t c. E[ST] = S0 [(1+ hFC)/(1+ hUS)]

d. Home currency approach: t Cash flow in 0 -2,000,000 1 900,000 2 900,000 3 900,000 NPV Foreign currency approach: RFC = 12.10% NPV in 158,115.36 NPV in $ $ 316,230.72

E[ST] 0.5000 0.5095 0.5192 0.5291

US$ $ (4,000,000.00) 1,766,355.14 1,733,339.16 1,700,940.29 $ 316,230.72