Name: Rudy Alvarez

Problem Set 4
Due on or before Day 6 (Monday)
Assigned Problem 1
Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the
exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate
of Swiss francs to euros?
Swiss francs/Euro= (1.41/1.00) x (1.00/1.64)= 0.86 sf/euro
Assigned Problem 2
Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. Six-month Canadian
securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). Sixmonth U.S. securities have an annualized return of 6.5% and a 6-month periodic return of 3.25%.
If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day
forward market?
Ft=(e0)(1+rh)/(1+rf)
Ft= (0.625) (1.0325/1.03)
=0.627 US dollars/Canadian dollars or 1.596 Canadian dollars/US dollars
Assigned Problem 3
In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still
sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what
would the car be selling for today in U.S. dollars?
1985 exchange rate = 1,476,000yen/$8,200 dollars= 180 yen/dollar
Exchange rate today= 144yen/dollar; 144 yen/180 yen per dollar = 0.8
Todays price= $8,200/0.8= $10,250
Assigned Problem 4
Suppose Stack Pool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The
exchange rate for dollars to pounds was 1 = 2 U.S. dollars. This year the exchange rate is 1 =
1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or
loss in inventory value in U.S. dollars as a result of the change in exchange rates?
This years inventory= 240,000 x $1.82= $436,800
Last years inventory= 240,000 x $2.00= $480,000
Loss in inventory value $436,800-$480,000= $ -43,200

Assigned Problem 5
Taco Trucking, a U.S.-based company, is considering expanding its operations into a foreign
country. The required investment at Time = 0 is $10 million. The firm forecasts total cash
inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible
terminal value of $5 million. In addition, due to political risk factors, Taco believes that the gross
terminal value will be only $5 million. However, the government of the host country will block
20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Taco's
cost of capital is 15%, but it adds one percentage point to all foreign projects to account for
exchange rate risk. Under these conditions, what is the project's NPV?

Year

Cash flow
projected (in
millions)

Percent of
cash
unrestricted

1
2
3
4
5

$4
$4
$6
$6
$5

0.8
0.8
0.8
0.8
0.8

Cash flow
that can be
repatriated
(in
millions)
$3.2
$3.2
$4.8
$4.8
$4.0

In millions
NPV=$3.2/1.16^1 + $3.2/1.16^2 + $4.8/1.16^3 + $4.8/1.16^4 +$4.0/1.16^5 -$10 (required
investment)
NPV= $3.2x (0.862) + $3.2 x(0.743) + $ 4.8x (0.641) + $4.8 x(0.552) + $4.0 x (0.476) - $10
= 2.76 + 2.38 + 3.08 + 2.65 + $1.90 - $10= 2.77 million