Question 3 a) Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been...

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Question 3 a) Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steadily, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try to execute a covered interest arbitrage and thereby earn some profits. Using the data in the following table, analyze the potential profits from covered interest arbitrage. Assumptions Arbitrage funds available Spot exchange rate Value $5,000,000 Yen Equivalent $1 118.60 $1 118.00 4.8% 3.4% 180-day forward rate 180-day (US dollar) interest rate (per annum) 180-day (Japanese yen) interest rate (per annum) (6 marks) b) Based on information in a), what should be the expected 3-month forward rate that makes covered interest arbitrage is not feasible? (2 marks) c) The following is the forecasted net cash flows of Tuti Inc. The costs, revenue, and cash flow would be affected by three possible exchange rate scenarios for the Australian dollar (A$): (1) AS = $.60, (2) AS = $.65, and (3) AS = $.70. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that A$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Forecasted Net Cash Flows: Tuti Inc. (in millions of U.S. dollars and Australian dollars) Sales Cost of Materials Operating Expenses Interest Expense Cash Flow U.S. Business $800 500 300 100 -$100 Australian Business A$800 A$100 0 0 A$700 Would Tuti's cash flow be favorably affected with appreciation or depreciation of the Australian dollar? (2 marks) d) In your opinion, should countries in a single region have a single monetary system OR adopt their own monetary system? Support your argument with example and explanation. (5 marks) Question 3 a) Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steadily, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try to execute a covered interest arbitrage and thereby earn some profits. Using the data in the following table, analyze the potential profits from covered interest arbitrage. Assumptions Arbitrage funds available Spot exchange rate Value $5,000,000 Yen Equivalent $1 118.60 $1 118.00 4.8% 3.4% 180-day forward rate 180-day (US dollar) interest rate (per annum) 180-day (Japanese yen) interest rate (per annum) (6 marks) b) Based on information in a), what should be the expected 3-month forward rate that makes covered interest arbitrage is not feasible? (2 marks) c) The following is the forecasted net cash flows of Tuti Inc. The costs, revenue, and cash flow would be affected by three possible exchange rate scenarios for the Australian dollar (A$): (1) AS = $.60, (2) AS = $.65, and (3) AS = $.70. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that A$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Forecasted Net Cash Flows: Tuti Inc. (in millions of U.S. dollars and Australian dollars) Sales Cost of Materials Operating Expenses Interest Expense Cash Flow U.S. Business $800 500 300 100 -$100 Australian Business A$800 A$100 0 0 A$700 Would Tuti's cash flow be favorably affected with appreciation or depreciation of the Australian dollar? (2 marks) d) In your opinion, should countries in a single region have a single monetary system OR adopt their own monetary system? Support your argument with example and explanation. (5 marks)