CP

Spreadsheet Problem 577

Assume that interest rate parity holds. In both the spot market and the 90-day forward market

1 Japanese yen equals 0.0086 dollar. The 90-day risk-free securities yield 4.6 percent in Japan.

What is the yield on 90-day risk-free securities in the United States?

In the spot market 7.8 pesos can be exchanged for 1 U.S. dollar. A compact disk costs $15 in the

United States. If purchasing power parity holds, what should be the price of the same disk in

Mexico?

Spreadsheet Problem

Start with the partial model in the file Ch 15 P14 Build a Model.xls from the textbook’s web

site. Yohe Telecommunications is a multinational corporation that produces and distributes

telecommunications technology. Although its corporate headquarters are located in Maitland,

Florida, Yohe usually must buy its raw materials in several different foreign countries using sev-

eral different foreign currencies. The matter is further complicated because Yohe usually sells its

products in other foreign countries. One product in particular, the SY-20 radio transmitter,

draws its principal components, Component X, Component Y, and Component Z, from Ger-

many, Mexico, and England, respectively. Specifically, Component X costs 84 euros, Compo-

nent Y costs 650 Mexican pesos, and Component Z costs 105 British pounds. The largest mar-

ket for the SY-20 is in Japan, where it sells for 38,000 Japanese yen. Naturally, Yohe is

intimately concerned with economic conditions that could adversely affect dollar exchange

rates. You will find Tables 15-1, 15-2, and 15-3 useful for this problem.

a.How much, in dollars, does it cost for Yohe to produce the SY-20? What is the dollar sale

price of the SY-20?

b.What is the dollar profit that Yohe makes on the sale of the SY-20? What is the percentage

profit?

c.If the U.S. dollar were to weaken by 10 percent against all foreign currencies, what would be

the dollar profit for the SY-20?

d.If the U.S. dollar were to weaken by 10 percent only against the Japanese yen and remained

constant relative to all other foreign currencies, what would be the dollar and percentage

profits for the SY-20?

e.Using the forward exchange information from Table 15-3, calculate the return on 1-year se-

curities in Germany, if the rate of return on 1-year securities in the U.S. is 4.9 percent.

f.Assuming that purchasing power parity (PPP) holds, what would be the sale price of the SY-

20 if it were sold in England rather than Japan?

15–14

BUILD A MODEL:

MULTINATIONAL FINANCIAL

MANAGEMENT

15–13
PURCHASING POWER PARITY

15–12

INTEREST RATE PARITY

Multinational Financial Management 571