Professional Documents
Culture Documents
Group Assignment-2 Answer
Group Assignment-2 Answer
Group Assignment 2
Total Marks : 50
Submission Deadline: 5th December
1. Kazuma Matsumoto, a foreign exchange trader in Japan, has JPY 50,000,000 for short-term
money market investment and wants to make profit based on the following rates. Explain specific
steps that Kazuma must take to make a covered interest arbitrage. State your answer in JPY.
3-month Germany interest rate:
Spot rate:
JPY 125.9100/EUR
JPY 126.8500/EUR
(5 marks)
Answer:
INVEST
JPY50,000,000
END
JPY 50187500
( 1 + 0.015 / 4)
JPY50,732186.04
S = 125.91/EUR
F990 = 126.85/EUR.
EUR 399,938.4
( 1 + 0.0285 / 4)
2. Memo Inc. is a company producing sport equipment in Seattle. Memo Inc. wants to expand the
production and business to South East Asia. The company is considering establishing a new
subsidiary in Singapore. The following information has been gathered to assess the project:
1
Initial investment required for plant and equipment is USD65 million. The current spot rate is
SGD1.2500/USD.
The life span of the project is 3 years and the subsidiary is expected to be sold at the end of
year 3 to an acquiring firm at a price of SGD70 million after considering the capital gains
taxes. The salvage value received by Memo Inc. after the project termination is not subject to
the withholding tax.
The fixed costs are estimated to be SGD7 million annually.
The sales and variable cost of the sport equipment in Singapore and the value of currency are
as following.
Year
1
2
3
Sales
SGD 25,000,000
SGD 35,000,000
SGD 40,000,000
Variable Cost
SGD1,200,000
SGD1,800,000
SGD2,400,000
All cash flow received will be remitted to the parent company in the United States (US) at the
end of each year. The subsidiary will use its working capital to support the ongoing
operations.
The Singapore government is charging an income tax of 35% on income. However, the
Singapore government will not impose any withholding tax on earning remitted by the
subsidiary. The US government charges a 5% tax on the income remitted to the parent
company in United States. Hint* Tax for US government is in USD.
The annual depreciation for the plant and equipment is SGD6 million.
The required rate of return for Memo Inc. is 15% on this project.
(10 marks)
Answer:
Sales (SGD)
Variable Cost (SGD)
Fixed Cost (SGD)
Depreciation (SGD)
EBT (SGD)
Singapore Tax (35%)
EAT (SGD)
Depreciation (SGD)
Net CF (SGD)
Salvage value
25,000,000
1,200,000
7,000,000
6,000,000
10,800,000
3,780,000
7,020,000
6,000,000
13,020,000
35,000,000
1,800,000
7,000,000
6,000,000
20,200,000
7,070,000
13,130,000
6,000,000
19,130,000
40,000,000
2,400,000
7,000,000
6,000,000
24,600,000
8,610,000
15,990,000
6,000,000
21,990,000
70,000,000
NPV=
13,020,000
0.785
10,220,700
511035
9,709,665
0.8696
8443186.96
19,130,000
0.8
15,304,000
765200
14,538,800
91,990,000
0.81
74,511,900
3725595
70,786,305
0.7561
10993421.55
0.6575
46543144.57
USD 70,786305
USD 9,709,665 USD 14, 538,800
+
+ 3 USD 65,000,000
2
(1.15)
1.15
(1.15)
3. Millennium Publications, an American company has to pay NZD 1 million in three months to
its supplier in New Zealand. The current spot rate is USD 0.6100/NZD. The company is thinking
of using option in order to reduce transaction exposure as the value of New Zealand Dollar is
expected to increase when the payment due.
Based on the information above, which option should the company choose? How much is the
total cost to the company if they used option market to hedge this transaction exposure. Assume
the spot rate three months from now is USD 0.6300/NZD.
(5 marks)
Answer:
Choose Call option ( 1 mark)
Cost of premium for call = NZD 1 million x USD 0.6100/NZD x 1.5%= USD 9150 (1)
Opportunity cost = USD 9150 x [1+ (10%x 90/360)] = 9150 x 1.025 =9378.75 (1)
Exercised option: Cost= NZD 1 million x USD 0.6200/NZD = USD620,000(1)
Total cost = USD 620000+9378.75= USD 629,378.75 (1)
Denmark
United
Kingdom
32
United
Kingdom
Australia
38
48
Switzerland
60
50
Australia
Switzerland
45
24
22
14
15
30
As a financial officer for the company, you are expected to do the multilateral netting for
Meximillion Group. Fill in the blanks inside the netting schedule below.
(10 marks)
Answer:
As a financial officer for the company, you are expected to do the multilateral netting for
Meximillion Group. Fill in the blanks inside the netting schedule below.
RECEIVING
SUBSIDIARY
United
Kingdom
Australia
Switzerland
Total
receipt
Denmark
23
30
United
Kingdom
Australia
26
26
Switzerland
36
36
15
87
Total Payment
36
85
22
Total
Receipt/
(payment
)
-6
-85
4
87
-
i) How much is the cash balance budgeted for adequate protection for Ole Malindah
under decentralized depository?
(4 marks)
Answer:
Malaysia
Seri
Lanka
China
Total
ii)
7,200,000
12,700,000
1,800,000
2,750,000
A+ 2B
6100000
1300000
10800000
18200000
Answer:
Standard deviation = {(800000)2+(150000)2+(1800000)2}0.5= GBP 1,975,475
Malaysia
Seri
Lanka
China
Total
iii)
A+ 2B
1,975,475
16,650,949
7,200,000
12,700,000
How much can Ole Malindah save if the company choose centralized depository for
all the subsidiaries?
(2 marks)
Answer:
18,200,000-16,650,949 = GBP 1,549,051
6. Mirhad Furniture Co buys specialized office equipments from Sukon AG and sells them to
Spanish customer. Ola Gola Inc is one of Mirhads customer, bought the office equipments at a
5
Answer:
All-in-Cost of Trade Acceptance
$
500,000.00
(50,000.00)
$
450,000.00
(1,687.50)
(2,812.50)
$
445,500.00
4.040%
b) What are Mirhads net cash proceeds, including the cash down payment?
(3 marks)
Answer:
$
50,000
445,500.00
$
495,500.00
Down payment
Proceeds of acceptance
Total cash proceeds