Finance Grenoble Assignment

INTERNATIONAL FINANCE ASSIGNMENT

Presented to: Professor O. Cole

John Gomez Londono

A4015212

GRENOBLE GRADUATE SCHOOL OF BUSINESS

LONDON, UNITED KINGDOM

1. Victoria Exports. A Canadian exporter, Victoria Exports, will be receiving six payments of €10,000, ranging from now to 12 months in the future. Because the company keeps cash balances in both Canadian dollars and U.S. dollars, it can choose which currency to change the euros to at the end of the various periods. Which currency appears to offer the better rates in the forward market?

Period C$/euro US$/euro

Spot N: 360 1.4811 1.1914

X1 month 30 1.4816 1.1926

X2 months 60 1.4823 1.1941

X3 months 90 1.4830 1.1956

X6 months 180 1.4860 1.2013

X12 months 360 1.4932 1.2130

As we want to know which currency offers the better rates in the forward market, the following formula will be used:

BOTH CURRENCIES ARE PREMIUM. HOWEVER, THE US DOLLAR WILL OFFER THE BETTER RATES BECAUSE IS HIGHER THAN THE CANADIAN ONE.

2. Japanese-US parity conditions: Use the following data to diagram and calculate whether international parity conditions hold between Japan and the United States. What is the forecasted change in the Japanese yen/US dollar (¥/$) exchange rate one year hence?

Forecast annual rate of inflation for Japan (I¥) 1.0%

Forecast annual rate of inflation for United States (I$) 5.0%

One-year interest rate for Japan (r¥) 4.0%

One-year interest rate for United States (r$) 8.0%

Spot exchange rate (¥/$) 104.00

One-year forward exchange rate (¥/$) 100.00

THE FORECAST CHANGE IS 0,96, BUT THERE IS NO COVERED ARBITRAGE PROFIT BECAUSE THERE IS INTERNATIONAL PARITY HOLD BETWEEN US AND JAPAN, AND FORFWARD RATES ARE ON AVERAGE THE SAME AS FUTURE SOPT RATES

3. Mary Martin, the treasurer of Canon Candy Company believes interest rates are going to rise, so she wants to swap her future floatation rate interest payments for fixed rates. At present she is paying LIBOR + 2% per annum on $5,000,000 of debt for the next 2 years, with payments due semiannually. LIBOR is currently 4% per annum. Ms. Martin has just made an interest payment today, so the next payment is due 6 months from today. Ms. Martin finds that she can swap her current floating rate payments for fixed payments of 7% per annum.

Canon Candy’s weighted average cost of capital is 12% which Ms. Martin calculates to be 6% per 6 months period compounded semiannually.

Fixed rate: 7%

Loan: $5,000,000

LIBOR: 4%

Spread: 2%

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