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Chapter 5: Q2BP (page 681)

Suppose a polish zloty is selling for $0.3414 and a British pound is selling for 1.4973. what is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a British pound?

Short Answer

Expert verified

4.3857 Polish zlotys are equal to 1 British pound

Step by step solution

01

Meaning of cross rate

Cross rate is used where one currency exchange rate is not available against all foreign currencies exchange rates

02

Explanation

The cross rate between the polish zloty and the British pound was 4.3857. to determine this value, we show that one dollar would buy 2.9291 polish zloty (1/0.3414) and a pound was equal to 1.4973 dollars. Thus, 2.9291 polish zloty per dollar times 1,4973 dollars per pound equaled 4.3857 polish zloty per pound.

03

Calculation of cross rate

1$=(10.3414)polishzloty

1$=2.9291polishzloty

And,1pound=$1.4973

Thus,$1.4973=(2.9291×1.4973)polishzloty

Therefore,1pound=$1.4973=4.3857polishzloty .

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An investor in the United States bought one-year Brazilian security valued at 195,000 Brazilian reals. The U.S. dollar equivalent was 100,000. The Brazilian security earned 16 percent during the year, but the Brazilian real depreciated 5 cents against the U.S. dollar during the period (\(0.51 to \)0.46). after transferring the funds back to the United States, what was the investor’s return on her \(100,000? Determine the total ending value of the Brazilian investment in Brazilian reals and then translate this Brazilian value to U.S. dollars. Then compute the return on the \)100,000.

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The Office Automation Corporation is considering a foreign investment. The initial cash outlay will be \(10 million. The current foreign exchange rate is 2 ugans 5 \)1. Thus the investment in foreign currency will be 20 million ugans. The assets have a useful life of five years and no expected salvage value. The firm uses a straight-line method of depreciation. Sales are expected to be 20 million ugans and operating cash expenses 10 million ugans every year for five years. The foreign income tax rate is 25 percent. The foreign subsidiary will repatriate all aftertax profits to Office Automation in the form of dividends. Furthermore, the depreciation cash flows (equal to each year’s depreciation) will be repatriated during the same year they accrue to the foreign subsidiary. The applicable cost of capital that reflects the riskiness of the cash flows is 16 percent. The U.S. tax rate is 40 percent of foreign earnings before taxes.

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Year 0 .......................... \(152.0ugans

Year 1 .......................... \)152.2ugans

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