BWFF 3043 INTERNATIONAL FINANCE

Group Assignment 2
Total Marks : 50
Submission Deadline: 5th December
1. Kazuma Matsumoto, a foreign exchange trader in Japan, has JPY 50,000,000 for short-term
money market investment and wants to make profit based on the following rates. Explain specific
steps that Kazuma must take to make a covered interest arbitrage. State your answer in JPY.
3-month Germany interest rate:

2.85% per annum

3-month Japan interest rate:

1.5% per annum

Spot rate:

JPY 125.9100/EUR

3-month Forward Rate

JPY 126.8500/EUR
(5 marks)

Answer:
INVEST
JPY50,000,000

END
JPY 50187500

( 1 + 0.015 / 4)

JPY50,732186.04

S = 125.91/EUR

EUR 397, 109

F990 = 126.85/EUR.

EUR 399,938.4

( 1 + 0.0285 / 4)

Different in JPY = JPY50,732186.04- JPY 50,187,500= JPY544,686.04

2. Memo Inc. is a company producing sport equipment in Seattle. Memo Inc. wants to expand the
production and business to South East Asia. The company is considering establishing a new
subsidiary in Singapore. The following information has been gathered to assess the project:
1

BWFF 3043 INTERNATIONAL FINANCE

Group Assignment 2

Initial investment required for plant and equipment is USD65 million. The current spot rate is
SGD1.2500/USD.
The life span of the project is 3 years and the subsidiary is expected to be sold at the end of
year 3 to an acquiring firm at a price of SGD70 million after considering the capital gains
taxes. The salvage value received by Memo Inc. after the project termination is not subject to
the withholding tax.
The fixed costs are estimated to be SGD7 million annually.
The sales and variable cost of the sport equipment in Singapore and the value of currency are
as following.
Year
1
2
3

Sales
SGD 25,000,000
SGD 35,000,000
SGD 40,000,000

Variable Cost
SGD1,200,000
SGD1,800,000
SGD2,400,000

Estimated Spot rate

USD 0.7850/SGD
USD0.8000/SGD
USD0.8100/SGD

All cash flow received will be remitted to the parent company in the United States (US) at the
end of each year. The subsidiary will use its working capital to support the ongoing
operations.
The Singapore government is charging an income tax of 35% on income. However, the
Singapore government will not impose any withholding tax on earning remitted by the
subsidiary. The US government charges a 5% tax on the income remitted to the parent
company in United States. Hint* Tax for US government is in USD.
The annual depreciation for the plant and equipment is SGD6 million.
The required rate of return for Memo Inc. is 15% on this project.

What is the net present value (NPV) for this project?

(10 marks)

Answer:

Sales (SGD)
Variable Cost (SGD)
Fixed Cost (SGD)
Depreciation (SGD)
EBT (SGD)
Singapore Tax (35%)
EAT (SGD)
Depreciation (SGD)
Net CF (SGD)
Salvage value

25,000,000
1,200,000
7,000,000
6,000,000
10,800,000
3,780,000
7,020,000
6,000,000
13,020,000

35,000,000
1,800,000
7,000,000
6,000,000
20,200,000
7,070,000
13,130,000
6,000,000
19,130,000

40,000,000
2,400,000
7,000,000
6,000,000
24,600,000
8,610,000
15,990,000
6,000,000
21,990,000
70,000,000

BWFF 3043 INTERNATIONAL FINANCE

Group Assignment 2
CF after SV (SGD)
Exchange Rate
CF in USD B4 tax
US tax (5%)
CFAT in USD
PVIF 15%
PV of CF

NPV=

13,020,000
0.785
10,220,700
511035
9,709,665
0.8696
8443186.96

19,130,000
0.8
15,304,000
765200
14,538,800

91,990,000
0.81
74,511,900
3725595
70,786,305

0.7561
10993421.55

0.6575
46543144.57

USD 70,786305
USD 9,709,665 USD 14, 538,800
+
+ 3 USD 65,000,000
2
(1.15)
1.15
(1.15)

= USD 979,753.08 or 978306.9 (depends on decimal point in TVM)

3. Millennium Publications, an American company has to pay NZD 1 million in three months to
its supplier in New Zealand. The current spot rate is USD 0.6100/NZD. The company is thinking
of using option in order to reduce transaction exposure as the value of New Zealand Dollar is
expected to increase when the payment due.

Call option on NZD 1 million at exercise price of USD 0.6200/NZD: a 1.5%

premium
Put option on NZD 1 million at exercise price of USD 0.6205/NZD: a 1%
premium
WACC for Millenium is at 10%

Based on the information above, which option should the company choose? How much is the
total cost to the company if they used option market to hedge this transaction exposure. Assume
the spot rate three months from now is USD 0.6300/NZD.
(5 marks)

Answer:
Choose Call option ( 1 mark)
Cost of premium for call = NZD 1 million x USD 0.6100/NZD x 1.5%= USD 9150 (1)
Opportunity cost = USD 9150 x [1+ (10%x 90/360)] = 9150 x 1.025 =9378.75 (1)
Exercised option: Cost= NZD 1 million x USD 0.6200/NZD = USD620,000(1)
Total cost = USD 620000+9378.75= USD 629,378.75 (1)

BWFF 3043 INTERNATIONAL FINANCE

Group Assignment 2
4. Meximillion Group has four subsidiaries located in Denmark, United Kingdom, Australia and
Switzerland. The company is using multilateral netting in order to optimize their cash flow. The
following is the intersubsidiary payments matrix for Meximillion Group.
RECEIVING
SUBSIDIARY

PAYING SUBSIDIARY (Euro in Millions)

Denmark

Denmark

United
Kingdom
32

United
Kingdom
Australia

38

48

Switzerland

60

50

Australia

Switzerland

45

24

22

14

15
30

As a financial officer for the company, you are expected to do the multilateral netting for
Meximillion Group. Fill in the blanks inside the netting schedule below.
(10 marks)

Answer:
As a financial officer for the company, you are expected to do the multilateral netting for
Meximillion Group. Fill in the blanks inside the netting schedule below.
RECEIVING
SUBSIDIARY

PAYING SUBSIDIARY (Euro in Millions)

Denmark

United
Kingdom

Australia

Switzerland

Total
receipt

Denmark

23

30

United
Kingdom
Australia

26

26

Switzerland

36

36

15

87

Total Payment

36

85

22

Total
Receipt/
(payment
)
-6
-85
4
87
-

BWFF 3043 INTERNATIONAL FINANCE

Group Assignment 2
5. Ole Malindah, a British food manufacturer has been setting separate operating cash balances in
each subsidiary at a level equal to expected cash needs plus two standard deviations above those
needs, which is based on a statistical analysis of cash flow volatility. Expected cash needs and
one standard deviation of those needs are as follows.
Country of Subsidiary
Malaysia
Seri Lanka
China
Total

Expected Cash Needed (GBP)

4,500,000
1,000,000
7,200,000
12,700,000

One Standard Deviation GBP)

800,000
150,000
1,800,000
2,750,000

i) How much is the cash balance budgeted for adequate protection for Ole Malindah
under decentralized depository?
(4 marks)

Answer:
Malaysia
Seri
Lanka
China
Total

ii)

Expected Cash Needed

4,500,000
1,000,000

One Standard Deviation

800,000
150,000

7,200,000
12,700,000

1,800,000
2,750,000

A+ 2B
6100000
1300000
10800000
18200000

If all precautionary balances were combined in a central account at the headquarter in

Manchester, calculate the cash balance budgeted for adequate protection for Ole
Malindah under centralized depository?
(4 marks)

Answer:
Standard deviation = {(800000)2+(150000)2+(1800000)2}0.5= GBP 1,975,475
Malaysia
Seri
Lanka
China
Total

iii)

Expected Cash Needed

4,500,000
1,000,000

One Standard Deviation

A+ 2B

1,975,475

16,650,949

7,200,000
12,700,000

How much can Ole Malindah save if the company choose centralized depository for
all the subsidiaries?
(2 marks)

Answer:
18,200,000-16,650,949 = GBP 1,549,051
6. Mirhad Furniture Co buys specialized office equipments from Sukon AG and sells them to
Spanish customer. Ola Gola Inc is one of Mirhads customer, bought the office equipments at a
5

BWFF 3043 INTERNATIONAL FINANCE

Group Assignment 2
wholeprice of EUR500,000. Final payment is due to Mirhad in 3 months. Ola Gola paid
EUR50,000 as cash down payment and the balance will be due in 3 months without any interest
charged as a sales incentive. Mirhad will have the Ola Gola receivable accepted by Allian
Acceptace for a 1.5% fee and then sell it at 2.5% per annum discount to Will Fargo Bank.
a) What is the annualized percentage all-in-cost to Mirhad Furniture Co?
(7 marks)

Answer:
All-in-Cost of Trade Acceptance
$
500,000.00
(50,000.00)
$
450,000.00

Face amount of sale

Less cash down-payment
Amount for financing
Less trade acceptance fee
(450000 x 1.5% x (90/360) )
Less discount for the period
(450000 x 2.5% x (90/360))

(1,687.50)
(2,812.50)
$
445,500.00

Proceeds to Nakatomi Toyota

Annualized percentage all-in-cost (AIC)

[(1687.50 +2812.5) / 445500 ] x (360/90)

4.040%

b) What are Mirhads net cash proceeds, including the cash down payment?
(3 marks)

Answer:
$
50,000
445,500.00
$
495,500.00

Down payment
Proceeds of acceptance
Total cash proceeds