CHOOSE THE CORRECT ANSWER FOR THE QUESTIONS GIVEN BELOW. THEN GIVE REASONS TO SUPPORT YOUR ANSWER AND ALSO GIVE REASONS WHY THE OTHER OPTIONS IS INCORRECT.

Assume that you are estimating a US dollar hurdle rate for a Mexican company with US operations. Which of the following would you use as your risk free rate? (You can assume that Mexicos sovereign rating is Baa1 for both its local currency and foreign currency bonds)

a. The rate on a ten-year US treasury bond (2%)

b. The rate on a 3-month US treasury bill (0.25%)

c. The rate on a dollar denominated Mexican Government bond (3.5%)

d. The rate on a peso denominated Mexican Government bond (6%)

e. The rate on a US dollar denominated bond issued by the Mexican company (4.5%)

f. None of the above

Assume that you are now estimating a peso hurdle rate for a Mexican company with US operations. Which of the following would you use as your risk free rate? (You can assume that Mexicos sovereign rating is Baa1 for both its local currency and foreign currency bonds)

a. The rate on a ten-year US treasury bond (2%)

b. The rate on a 3-month US treasury bill (0.25%)

c. The rate on a dollar denominated Mexican Government bond (3.5%)

d. The rate on a peso denominated Mexican Government bond (6%)

e. The rate on a US dollar denominated bond issued by the Mexican company (5%)

f. None of the above