Question III You represent a US company which is negotiating a joint venture agreement with a...

 

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Question III You represent a US company which is negotiating a joint venture agreement with a Swiss partner. The agreement would last for 20 years at the end of which the Swiss have agreed to sell their stake in the joint venture to the US partner for 150 million Swiss francs. Just as he was leaving the meeting, the representative of the Swiss company said: "If you would prefer the exit price to be fixed in US dollars, please replace 150 million Swiss francs with 180 million US dollars before you sign the agreement." You observe that at the current exchange rate a US dollar is worth 0.91 Swiss Francs, and are tempted to accept this offer. In the evening, at a cocktail party, you find yourself seated next to an economist who works in the research department of a large global bank, and you ask her about the likely movement of the Swiss franc over the next 20 years. She deftly avoids giving a forecast, but does mention that her bank expects inflation in the US to average 1% over the long term while the corresponding number for Switzerland was -0.1%. Based on only this information, what would you recommend to your boss? Show your workings. Question III You represent a US company which is negotiating a joint venture agreement with a Swiss partner. The agreement would last for 20 years at the end of which the Swiss have agreed to sell their stake in the joint venture to the US partner for 150 million Swiss francs. Just as he was leaving the meeting, the representative of the Swiss company said: "If you would prefer the exit price to be fixed in US dollars, please replace 150 million Swiss francs with 180 million US dollars before you sign the agreement." You observe that at the current exchange rate a US dollar is worth 0.91 Swiss Francs, and are tempted to accept this offer. In the evening, at a cocktail party, you find yourself seated next to an economist who works in the research department of a large global bank, and you ask her about the likely movement of the Swiss franc over the next 20 years. She deftly avoids giving a forecast, but does mention that her bank expects inflation in the US to average 1% over the long term while the corresponding number for Switzerland was -0.1%. Based on only this information, what would you recommend to your boss? Show your workings.

Answer rating: 100% (QA)

To correctly give recommendation first one has to see the present exchange rate parity and expected ... View the full answer