please answer all queshion 4 5 6 4. Suppose you\'re aware of the following inves

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please answer all queshion

4
5
6

4. Suppose you're aware of the following investment opportunity: You could open a hotpot restaurant near your home for 100,000 yuan. If business is strong, you could net 60,000 yuan in after-tax cash flows each year for the next 6 years. a) If you know for certain the business would be a success, would this be a risky investment? b) Now assume this is a risky venture and that there's a 60% chance it is a success and a 40% chance you go bankrupt within a year. You decided to go ahead and invest. If the business subsequently go bankrupt, did you make the wrong decision based on the information you had at the time? Why or why not? 5. You are the CEO of a Mexican company that took out a dollar-denominated loan from an American bank one year ago when the peso-dollar exchange rate was 10 pesos per dollar. You borrowed SSD,000 at 5% interest and promised to repay the entire balance and interest in one payment at the end of the year. The current exchange rate is 11 peso per dollar. What effective peso-denominated rate of interest did you pay for the loan? 6. Supposed you are to receive a 2,200 Swiss franc check from your publishing agent in three months. You have the opportunity to enter the forward currency market and sign a contract to purchase dollars in three months at a price of 1.1 Swiss franc per dollar. a. What will be your dollar proceeds in three months if you hedge your exchange rate risk? b. How many dollar will you gain or lose by hedging versus risk retention if the price of a dollar three months hence is 1.15 Swiss franc?

Explanation / Answer

4. a ) NO, IT WOULD NOT BE RISKY IF HE IS CERTAIN ABOUT THE SUCESS.

b) 100000 <success 60% 60000 ,60000, 60000 ,upto 6 th yr

failure 40% 0 then stop

whether to start the business or not is dependent on p.v of success and failure which will be computed as follows

100000 - {0.6* p.v of 60000(pvaf ,6)+0.4*0}

if the answer is positive then our decision would be to start the business and then only the decision is correct, either the business would later on turn success or failure.

5. Mexican co. took a loan 1 yr ago of $50000 from American co.when rate was 10pesos /$ and interest rate 5%

and to repay the same with interest now so current rate is 11 pesos/$

interest would be 50000*5% i.e $ 2500

full repayment would be $ 50000+2500 i.e $ 52500

in pesos it would be 52500*11 i.e 577500 pesos

so effective interest rate would be 77500*100/500000 i.e 15.5%

6.(a) We are to recieve 2200 swiss franc after three months so we have the opportunity to hedge it

so if we hedge then amount will recieved after 3 months 2200/1.1 i.e 2000 $

(b) if we have not hedge and subsequently rate turns out to be 1.15 swiss franc/ $ then $ would be recieved

2200/1.15 i.e 1913 $ approx.

and retention risk would be (2000 - 1913)$ i.e 87 $

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