d ngcengage.com/static nt i ir dech tmlht Id-593291&r; MIN DTAP Assignment 17- M
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d ngcengage.com/static nt i ir dech tmlht Id-593291&r; MIN DTAP Assignment 17- Multinational Financial Management Nodeld-216270947&eISBN-578; 1305635754 parent d Due on Dec 11 at 11 PM EST The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): Spot Exchange Rate 0.8798 One-Year Forward Exchange Rate 0.8935 Canadian dollar (U.S. dollar/Canadian dollar) The current one-year interest rate on us. Treasury securities is 7.35%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? 6.84% 4.85% 5.13% Q 5.70% Interest rate parity recognizes that when you invest in a country other than your home country, two factors affect your investment-returns on the investment itself and changes in the exchange rate. which of the following would cause the overall return on your investment to be lower than the investment's stated return? O Your home currency appreciates relative to the currency in which the investment is denominated O The currency in which the investment is denominated appreciates relative to your home currency O Your home currency depreciates relative to the currency in which the investment is denominated. Type here to searchExplanation / Answer
a.) US Interest Rate =7.35%
Canadian Interest Rate=??
Spot Rate =0.8798
Onr-Year Forward Rate =0.8935
Using Interest Rate Parity Condition,
0.8935 =0.8798 x (1+0.0735) / (1+r)
1+r = 1.0570
r=0.0570
Hence, the Canadian Rate of Interest is 5.70%
b.) The overall return on the investment will be lower if the domestic (home country) currency appreciates relative to the currency in which the investment is made.
Hence, option-a is the right answer.
c.) The statement is invalid because as the currency of lending country appreciates, it becomes more expensive for the borrowing company to repay the loan.
Hence, Option-a is the right answer.
d.) If companies borrow from countries with low interest rates, the potential gains from interest savings will likely be reduced by the losses from currency appreciation.
e.) The currency of a country with a higher inflation than Japan's inflation rate will apreciate over time against the yen.
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