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# Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have \$100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is \$0.689. What will be the yield on your investment if you invest in the Australian market? Show work and discuss.

Assignment 2DUE SUNDAY 10/28/1811:59 pm

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Chapter 6

1. Complete Internet Exercises 1,2,3 on page 217 of the textbook. http://www.boj.or.jp/en/index.htm/ Discuss your responses.

Chapter 8

1. Question 20, textbook page 279 and also provide an example and discuss in your own words.

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 3.      Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have \$100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is \$0.689. What will be the yield on your investment if you invest in the Australian market? Show work and discuss.

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 4.      Assume that the international Fisher effect (IFE) holds between the United States and the United Kingdom. The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7 percent, and the U.S. interest rate is 7 percent. What does this say about real interest rates expected by British investors?

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 5.      Assume that inflation in the United States is expected to be 9 percent, while inflation in Australia is expected to be 5 percent over the next year. Today you receive an offer to purchase a one-year put option for \$.03 per unit on Australian dollars at a strike price of \$0.72. Today the Australian dollar is quoted at \$0.70. You believe that purchasing power parity holds. Should you accept the offer and why?

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 6.      The inflation rate in the United States is 4 percent, while the inflation rate in Japan is 1.5 percent. The current exchange rate for the Japanese yen (¥) is \$0.0080. After supply and demand for the Japanese yen have adjusted according to purchasing power parity, the new exchange rate for the yen will be? Why?

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Chapter 13

1. Textbook Internet /Excel Exercises on page 434-435: 1 and 2 (Note: Do NOT use the IBM example unless it is one of the companies you are doing. Choose ANY ONE of the companies that you are doing for your paper, these are good review for your papers)

1. Textbook question 10 on page 431. Use your OWN words and opinions NOT the textbook resources and give a real example.

1. Textbook question 15 on page 432. Use your OWN words and opinions NOT the textbook resources

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Chapter 14

1. Textbook Complete Question 20 on page 461, which involves a financial calculator, or excel, or use one of the free online financial calculators to solve for NPV. Try your best showing your steps in calculating the NPV and decide whether to accept or reject the investment and why.

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11.  Assume that G Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is \$5 million. If the project is undertaken, G would terminate the project after four years. G’s cost of capital is 13 percent, and the project has the same risk as G’s existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):

 Year 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000

The current exchange rate of the Norwegian kroner is \$.135. G’s exchange rate forecasts for the Norwegian kroner over the project’s lifetime are listed below:

 Year 1 Year 2 Year 3 Year 4 \$.13 \$.14 \$.12 \$.15

 a.  ​ What is the net present value of the Norwegian project? Show steps and discuss.

 b. Assume that NOK8,000,000 of the cash flow in Year 4 represents the salvage value. G is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is? Show steps and discuss.

 c. ​ G is also uncertain regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV) of this project if a 16 percent cost of capital is used instead of 13 percent? Show steps and discuss. ———————————————————————————————————-

 12.           Backland Co. has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A\$) in the first year and A\$2,000,000 in the second. Backland would have to invest \$1,500,000 in the project. Backland has determined that the cost of capital for similar projects is 14 percent. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be \$.55 and \$.60, respectively? ​ Show work and discuss.   ————————————————————————————————————

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