FCF 9th Edition Chapter 21

Chapter 21Problems 1-18

Input boxes in tan

Output boxes in yellow

Given data in blue

Calculations in red

Answers in green

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and "Solver Add-In."

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Chapter 21Question 1

Input Area:

a. Cash 100$

Euro value per $ 1.5363

b. $ value per euro 0.6509$

c. Euro amount 5,000,000

f. Pesos per $ 10.3584

Output Area:

a. Euros 65.0915

b. One euro 1.5363$

c. Dollar value 7,681,672$

d. More worth New Zealand dollar

e. More worth Mexican peso

f. # of Pesos/Euro 15.9140

This is a cross rate.

g. Most valuable = Kuwait Dinar = $3.7595

Least valuable = Vietnam dong = $0.00006020


Input Area:

SF 100

100

US dollars 100$

SF value per $ 0.9531

$ per 1.9474$

Output Area:

100, since 194.740$

100, since (SF) 204.3227

Cross rate SF/ 2.0432

Cross rate /SF 0.4894


Input Area:

Spot /$ rate 108.2100

6 month /$ rate 106.9600

Spot $/C$ rate 1.0292

3 month $/C$ rate 1.0303

Output Area:

The yen is selling at a premium because it is

more expensive in the forward market than in

the spot market

$0.0092413 versus $0.0093493

The C$ is selling at a discount because it is

less expensive in the forward market than in

the spot market

$0.9716284 versus $0.9705911

The value of the dollar will fall

relative to the yen.

The value of the dollar will rise

relative to the Canadian dollar.


Input Area:

Spot exchange rate for C$ 1.06$

6-month forward rate for C$ 1.11$

Price of beer in Canada 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.

Input Area:

Exchange rate for /$ 112

Exchange rate for $/ 1.93$

b. Cross rate for / 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$



Input Area:

Spot rate for U.K. (/$) 0.5135

Forward rate for Great Britian 0.5204

Spot rate for Japan (/$) 108.21

Forward rate for Japan 106.96

Spot rate for Switzerland (SFr/$) 1.0492

Forward rate for Switzerland 1.0478

U.S. risk-free rate 2.20%

Output Area:

Great Britian 3.54%

Japan 1.04%

Switzerland 2.07%


Input Area:

Amount invested $30,000,000

Months to invest 3

Monthly U.S. interest rate 0.37%

Monthly British interest rate 0.51%

Spot rate for Great Britain 0.55

Forward rate for Great Britain 0.56

Output Area:

U.S. 30,334,233.62$

Great Britain 29,917,392.29$

Invest in U.S.


Input Area:

Spot rate for Poland 2.17

Expected rate 2.26

Duration (years) 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.


Input Area:

Singapore $ 1.3803

Quantity 30,000

Cost in Singapore $ 204.70

# days until arrival 90

Sales price 150.00$

Exchange rate change 10%

Output Area:

No change in exchange rate 50,967.18$

If exchange rate rises by10% 455,424.71$

If exchange rate falls 10% (443,369.80)$

Break-even $1.3647

Decline of -1.13%


Input Area:

Spot on krone 5.15

Forward on krone 5.22

Risk-free rate (U.S.) 3.8%

Risk-free rate (Norway) 5.7%

Days for contract 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


Input Area:

Inflation (U.S.) 3.90%

T-bills 5.80%

Australian gov't securities 4.00%

Canadian gov't securities 7.00%

Tiawanese gov't securities 9.00%

Output Area:

Australian inflation 2.10%

Canadian inflation 5.10%

Tiawanese inflation 7.10%


Input Area:

Spot on yen 114.32

Forward on yen 116.03

Number of months 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.


Input Area:

Spot on HUF 152.93

U.S. inflation rate 4.90%

Hungarian inflation rate 8.60%

# yrs to predict exchange rate 1

2

5

Output Area:

E[S1] (HUF) 158.59

E[S2] (HUF) 164.46

E[S5] (HUF) 183.39

You are relying on relative PPP.


Input Area:

Project cost 14,000,000 Year 1 cash flow 2,100,000 Year 2 cash flow 3,400,000 Year 3 cash flow 4,300,000 Spot rate ($/) 1.28U.S.risk-free rate 4.80%

Euroland risk-free rate 4.10%

Cost of capital 13.00%

Sales price in three years 9,600,000

Output Area:

E(S1) $/ 1.2886

E(S2) $/ 1.2973

E(S3) $/ 1.3060

Project cost in dollars 17,920,000.00$

Dollar value of CF in year 1 2,706,074.93$



Dollar value of sales price in year 3 12,537,555.31$

Total dollar value of year 3 CF 18,153,335.30$

NPV 510,173.30$


Input Area:

Cost (SF) 24,000,000

Cash flows (SF) 6,600,000

Required return 12%

Current exchange rate 1.090

Eurodollar rate 8%

Euroswiss rate 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 SFr E[St] US$

0 -24,000,000 1.0900 (22,018,348.62)$

1 6,600,000 1.0791 6,116,207.95

2 6,600,000 1.0683 6,177,987.83

3 6,600,000 1.0576 6,240,391.75

4 6,600,000 1.0470 6,303,426.01

5 6,600,000 1.0366 6,367,096.98

NPV 428,195.99$

c. R(SFr) 10.88%

NPV (SFr) 466,733.63

NPV ($) 428,195.99$


Input Area:

Assets (solaris) 23,000

Debt (solaris) 9,000

Equity (solaris) 14,000


b. Exchange rate in one year 1.40

c. Exchange rate in one year 1.12

Output Area:

a. Liabilities

Equity

Assets 19,166.67$ Total liabilities & equity

b. Liabilities

Equity


c. 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$


Input Area:

Assets (solaris) 23,000

Debt (solaris) 9,000

Equity (solaris) 14,000

Retained earnings (solaris) 1,250

Exchange rate 1.24

Output Area:

Liabilities

Equity


Liabilities

Equity


Balance Sheet (solaris)

Balance Sheet (dollars)

9,000.00$

15,250.00

24,250.00$

7,258.06$

12,298.39

19,556.45$


Input Area:

Cost () 2,000,000 Cash flows () 900,000 # of years 3

Required return 10%


Euro risk-free rate 7%

Dollar risk-free rate 5%

Output Area:

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

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

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

d. Home currency approach:

t Cash flow in E[ST] US$

0 -2,000,000 0.5000 (4,000,000.00)$

1 900,000 0.5095 1,766,355.14

2 900,000 0.5192 1,733,339.16

3 900,000 0.5291 1,700,940.29

NPV 316,230.72$

Foreign currency approach:

RFC = 12.10%

NPV in 158,115.36

NPV in $ 316,230.72$

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FCF 9th Edition Chapter 21