19.5- Euro-market investment and fund raising a U.S. based multinational company
ID: 2637427 • Letter: 1
Question
19.5- Euro-market investment and fund raising a U.S. based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP), and one in Japan (local currency yen Y). Forecast the business operations indicate the following short-term financing position for each subsidiary (in U.S. dollars)
Mexico: $80 million excess cash to be invested (lent)
Japan: $60 million funds to e raised (borrowed)
The management gathered the following data;
Currency
Item US$ MP Y
Spot exchange rate MP 11.60/US$ Y108.25/US$
Forecast percentage change -3.0% +1.5%
Interest rates
Nominal
Euro-market 4.00% 6.20% 2.00%
Domestic 3.75% 5.90% 2.15%
Determine the effective interest rate for all three currencies in both the Euro-market and the domestic market, and 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.)
Explanation / Answer
Effective interest rate calculation formula: (1+r/n)^n - 1
US
Euro market (1+4%/12)^12 - 1 = 4.03%
Domestic market (1+3.75%/12)^12 - 1 = 3.73%
Mexico
Euro market (1+6.2%/12)^12 - 1 = 6.29%
Domestic (1+5.9%/12)^12 - 1 = 6.04%
Japan
Euro market (1+2%/12)^12 - 1 = 1.93%
Domestic (1+2.15%/12)^12 - 1 = 2.42%
US
Euromarket
80*12*4.03*11.6 = 44,878.08
60*12*4.03*108.25 = 314,098.2
Domestic
80*12*3.73*11.6 = 41,537.28
60*12*3.73*108.25 = 290,716.2
Mexico
Euromarket
80*12*6.29*11.6 = 70,045.44
60*12*6.29*108.25 = 490,242.6
Domestic
80*12*6.04*11.6 = 67,261.44
60*12*6.04*108.25 = 470,757.6
Japan
Euromarket
80*12*1.93*11.6 = 21,492.48
60*12*1.93*108.25 = 150,424.2
Domestic
80*12*2.42*11.6 = 26949.12
60*12*2.42*108.25 = 188,614.8
Funds should be invested in Euromarket Mexico and funds should be raised in Japanese Euromarket.
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