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Calculating Euro Market Investment and Fund Raising

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Euromarket investment and Fund Raising, a U.S.-based multinational company, has
two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in
Japan (local currency, yen, ¥). Forecasts of business operations indicate the following
short-term financing position for each subsidiary (in equivalent U.S. dollars):

Mexico: $80 million excess cash to be invested (lent)
Japan: $60 million funds to be raised (borrowed)

The management gathered the following data:
Currency
-----------------------------------------------------------------------------------------------------
Item US$ MP ¥
------------------------------------------------------------------------------------------------------
Spot exchange rates MP 11.60/US$ ¥108.25/US$
Forecast percent change -3.0% 1.5%
Interest rates
Nominal
Euromarket 4.00% 6.20% 2.00%
Domestic 3.75% 5.90% 2.15%
Effective
Euromarket _________ _________ _________
Domestic _________ _________ ______

Determine the effective interest rates for all three currencies in both the Euromarket
and the domestic market; then indicate where the funds should be invested and
raised. (Note: Assume that because of local regulations, a subsidiary is not permitted
to use the domestic market of any other subsidiary.)

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Solution Summary

Euromarket investment and Fund Raising, a U.S.-based multinational company, has
two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in
Japan (local currency, yen, ¥).

Determine the effective interest rates for all three currencies in both the Euromarket
and the domestic market; then indicate where the funds should be invested and
raised. (Note: Assume that because of local regulations, a subsidiary is not permitted
to use the domestic market of any other subsidiary.)

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