Explore BrainMass
Share

International Finance for Japan and Investors

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

16. In 1990, a Japanese investor paid $100 million for an office building in downtown Los Angeles. At the time, the exchange rate was ¥145/$1. When the investor went to sell the building five years later, in early 1995, the exchange rate was ¥85/$1 and the building's value had collapsed to $50 million.

a. What exchange risk did the Japanese investor face at the time of his purchase?

b. How could the investor have hedged his risk?

c. Suppose the investor financed the building with a 10 percent downpayment in yen and a 90 percent dollar loan accumulating interest at the rate of 8 percent per annum. Since this is a zero-coupon loan, the interest on it (along with the principal) is not due and payable until the building is sold. How much has the investor lost in yen terms? In dollar terms?

d. Suppose the investor financed the building with a 10 percent downpayment in yen and a 90 percent yen loan accumulating interest at the rate of 3 percent per annum. Since this is a zero-coupon loan, the interest on it (along with the principal) is not due and payable until the building is sold. How much has the investor lost in yen terms? In dollar terms?

© BrainMass Inc. brainmass.com October 16, 2018, 9:11 pm ad1c9bdddf
https://brainmass.com/business/international-finance/international-finance-japan-investors-175225

Solution Preview

a. What exchange risk did the Japanese investor face at the time of his purchase?

ANSWER. The risk is that the value of the dollar would fall against the yen and that the dollar revenues would not keep up with the decline in the value of the dollar.

b. How could the investor have hedged his risk?

ANSWER. The investor could have financed his purchase of the building by borrowing dollars, so that the very same event that led to a decline in the yen value of his asset-namely, a dollar decline- would simultaneously reduce the yen cost of the liability used to finance that asset. He could also have taken out a long-dated forward contract to hedge the yen value of his building. Nothing would have protected the investor from the ...

Solution Summary

The following posting helps with international finance problems. Concepts covered include exchange rates, building value, investor, down payment, loans, and accumulating interest.

$2.19
Similar Posting

Multiple Choice Questions in International Finance: exchange rate, forecasts, speculation with currency futures,

1. If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________.

A. correctly priced
B. under priced
C. over priced
D. not enough information to determine if the price is appropriate or not

2. According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.

A. overvalued;approximately 21%
B. overvalued;approximately 27%
C. undervalued; approximately 21%
D. undervalued; approximately 27%

3. The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal U.S. ________ to/from Japan think this is good news and U.S. ________ to/from Japan think this is bad news.

A. importers; exporters
B. importers; importers
C. exporters; exporters
D. exporters; importers

4. Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.

A. long-term investment; long-term capital appreciation
B. long-term capital appreciation; desire to hedge a receivable
C. the desire to hedge a payable; the desire for long-term investment
D. the desire for long-term investment; the desire to hedge a payable

5. Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures?

A. $937.50 loss
B. $937.50 gain
C. £937.50 loss
D. £937.50 gain

6. A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

A. future
B. forward
C. option
D. swap

7. Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a

A. collateralized deposit.
B. marked market sum.
C. margin.
D. settlement.

8. Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?

A. Sell a pound currency futures contract.
B. Buy a pound currency futures contract.
C. Sell pounds today.
D. Sell pounds in six months.

---------
Can anyone help me with these review questions? Any assistance would be greatly appreciated. The book I'm using is Fundamentals of Multinational Finance Edition III.

View Full Posting Details