EMB670.

1
Assignment

1. Blue Demon Bank expects that the Chinese currency (the yuan) will depreciate against the dollar
from its spot rate of $0.15 to $0.13 in 40 days. The following inter-bank lending and borrowing rates
exist:
Currency Lending rate Borrowing rate
U S dollar 8.25% 8.40%
Chinese yuan 8.45% 8.80%
Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million yuan in the
interbank market, depending on which currency it wants to borrow. How could Blue Demon Bank
attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could
be generated from this strategy?
2. Given,
Rating assigned by company to factor Weight assigned by company to
within a range of 1-5 point scale factor according to importance
Political risk factors
Factor A 2 30%
Factor B 3 25%
Factor C 5 35%
Factor D 1 10%
Financial risk factors
Factor A 4 25%
Factor B 3 40%
Factor C 5 20%
Factor D 2 15%
The overall weight for political risk factor is 35% and for financial risk factor is 65%. Based on these
information determine the overall country risk rating. If the risk rating of a given country is 3.25, then
the country would be preferred to make investment?
3. Assume a US firm considers obtaining 35% of its one-year financing in Canadian dollars and 65% in
Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for the next year
are as follows:
Currency Possible % change in spot rate Probability of Possible % change in spot rate
Canadian dollar 5% 45%
Canadian dollar 4% 55%
Japanese yen 3% 25%
Japanese yen 6% 75%
The interest rate on Canadian dollar is 10% and in Japanese yen is 8%. Develop the possible effective
financing rates of the overall portfolio and the probability of each possibility based on the use of joint
probabilities.
4. Assume that the project’s required rate of return is 15% and the initial required outlay is $350000.
The pretax earnings are expected to be 600000 at the end of one year form investment in UK when the
exchange rate will be 1=$1.75. The British economy may weaken (probability = 30%), which would
cause the expected pretax earnings to be 460000. The British corporate tax rate may increase from 25%
to 35% (probability= 20%). These two forms of country risk are independent. Calculate the expected
value of the project’s net present value and determine the probability that the project will have a
negative NPV.
5. An US MNC has already invested its 40% fund in home country for earning 12% rate of return with
3.5% level of risk. Remaining 60% fund can be invested either in US or in AUS. If investment is made
in US then possible rates of return are 10% with 25% probability, 15% with 55% probability and 12%
with 20% probability. If investment is made in AUS then possible rates of return are 18% with 45%
probability, 11% with 15% probability and 20% with 40% probability. The correlation coefficient
between rates of return between investments in US is 0.55 and between US & AUS is -0.25. In which
country, should new investment be made?

6. An US MNC is planning to invest $25 million in Singapore (S$1= $0.60). Expected sales are 80000
units, 70000 units, 100000 units & 105000 units: expected selling price of S$550, S$655, S$660 &
S$480: budgeted variable cost per unit is S$200, S$210, S$250 & S$260 respectively in next four years.
Fixed costs per year are S$3 million for lease and S$2 million for operating. Singapore Government will
allow the MNC to charge maximum S$8 million as depreciation on plant per year. There is 30% tax on

income and 10% tax on fund remittance. It is expected that exchange rate will be prevailing same
during the investment period. Required rate of return of the MNC is 12%. Evaluate the capital
investment decision under the followings:
i. Subsidiary perspective and Parent perspective.
ii. S$ is expected to be stronger against $ with $0.55, $0.59, $0.63 & $0.65.
iii. S$ is expected to be weaker against $ with $0.57, $0.54, $0.49 & $0.47.
iv. Fund blockage for four years and reinvestment rate is 9%.

7. A U.S firm needs to borrow $100,000 for one year and requires to pay interest in US$ 15%, Canadian
dollar 10% and Malaysian ringgit 12%. There are 20% chance that the Canadian dollar will appreciate
by 2%, 70% chance that Canadian dollar will appreciate 3% and 10% chance that Canadian dollar will
appreciate 9%. Same way there are 35% chance that the Malaysian ringgit will depreciate by 1%, 40%
chance that Malaysian ringgit will appreciate 3% and 25% chance that Malaysian ringgit will appreciate
7%. The U. S. firm desires to borrow 42% fund from Canada and 58% fund from Malaysia in portfolio
form. Calculate the overall effective cost of capital for the firm.
8. Before tax earnings of a subsidiary of an American MNC for last five years are: (Million taka)
Year 1 2 3 4 5
Profits 1000 1200 900 1300 800
Exchange rate 0.0170 0.0172 0.0173 0.0168 0.0170

Current exchange rate is Tk.1=$0.016. The host government would have charged corporate tax @
30% and withholding tax @ 10%. The initial investment was Tk.5000 million and salvage value
would be Tk.1000 million. Capital investment to be depreciated under straight-line method. Exchange
rates are given in terms of dollar against taka. If the cost of capital of the parent company is 11%, then
it would be wise for the company to make investment?
9. Before tax earnings of a subsidiary of an American MNC for last five years are: (Million taka)
Year 1 2 3 4 5
Profits 1000 1200 900 1300 800
Exchange rate 0.0170 0.0172 0.0173 0.0168 0.0170

Current exchange rate is Tk.1=$0.016. The host government would have charged corporate tax @ 40%
and withholding tax @ 15%. The initial investment was Tk.5000 million and salvage value would be
Tk.1000 million. Capital investment to be depreciated under sum of years’ digit method. Exchange rates
are given in terms of dollar against taka. If the cost of capital of the parent company is 13%, then it
would be wise for the company to make investment?
10. An MNC is planning to invest invested its 30% fund in Singapore with possible rates of return are
12% with 25% probability, 15% with 55% probability and 18% with 20% probability. And 70% fund in
Canada with possible rates of return are 16% with 45% probability, 10% with 15% probability and 23%
with 40% probability. The correlation coefficient between rates of return between investments in two
countries is 0.55. Calculate portfolio return and risk.