FINA3020 International Finance
Assignment 3
Due Date: 18 March 2024 (9:30am for FINA3020C or 2:30pm for FINA3020B)
Questions:
1. GBA Company wishes to raise USD5,000,000 with debt financing. The funds will be
repaid with interest in 1 year. The treasurer of GBA Company is considering three
sources:
i. Borrow USD from Citibank at 1.50%
ii. Borrow EUR from Deutsche Bank at 3.00%
iii. Borrow GBP from Barclays at 4.00%
If the company borrows in euros or British pounds, it will not cover the foreign exchange
risk; that is, it will change foreign currency for dollars at today’s spot rate and buy foreign
currency back 1 year later at the spot rate prevailing then. The GBA Company has no
operations in Europe.
A representative of GBA contacts a local academic to provide projections of the spot
rates 1 year in the future. The academic comes up with the following table:
Projected Rate 1 Year in the
Currency Spot Rate Future
USD/GBP 1.5 1.55
USD/EUR 0.95 0.85
a. What is the expected interest rate cost for the loans in EUR and GBP? [2 marks]
b. What is the projected USD/GBP rate and USD/EUR rate for which the expected interest
costs would be the same for the three loans? [2 marks]
c. Should the company borrow in the currency with the lowest interest rate cost? Why or
why not? Would your answer change if GBA did generate cash flows in the UK and
continental Europe? [1 mark]
2. In 1985, R.J. Reynolds (RJR for short) acquired Nabisco Brands and financed the deal
with a variety of financial instruments, including three dual-currency Eurobonds. The first
dual-currency bond, lead-managed by Nikko, raised JPY25 billion (which was equivalent
to USD105.5 million at the time of issue). Coupons were paid in yen, but the required
final principal payment was not JPY25 billion but USD115.956 million. The coupon was
7.75%, even though a comparable fixed-rate Euroyen bond at that time carried only a
6.375% coupon. The actual 5-year forward rate at the time was around JPY/USD 200.
a. Given the “fat” coupon, is this bond necessarily a great deal for investors? [1 mark]
b. At maturity in August 1990, the spot exchange rate was JPY/USD 144. Was the bond
a good deal for investors assuming the position was unhedged? [1 mark]
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c. What was the actual IRR on the investment? [1 mark]
3. Suppose you are a U.S.-based investor, and you would like to diversify your stock
portfolio internationally. What advantages do ADRs offer you? Would it be wise to
restrict your international portfolio to only ADRs? [2 marks]
4. A U.S. institutional investor would like to purchase 10,000 shares of Lafarge. Lafarge is a
French firm that trades on the Paris Bourse, the London stock exchange, and the NYSE as
an ADR. At the NYSE, one depositary receipt is equivalent to one-fourth of a Lafarge
share. The U.S. investor asks its brokers to quote net prices, without any commissions, in
the three trading venues. There is no stamp tax in London on foreign shares listed there.
The stock quotes are as follows:
New York: USD 24.07–24.37
London: GBP 66.31–67.17
Paris: EUR 99.40–100.30
The exchange rate quotes from banks are as follows:
USD/EUR 0.9691–0.9695
USD/GBP 1.4575–1.4580
Compare the USD costs of purchasing 10,000 shares, or its equivalent, in New York,
London, and Paris. [3 marks]
5. A French institutional investor wishes to decrease its exposure to Taiwan. It is interested
in selling 20,000 shares of a particular Taiwanese firm that is currently in its portfolio. This
firm trades on the Taiwan Stock Exchange. A Taiwan-based broker quotes the Taiwan
dollar (TWD) price of the shares of this firm as 150.35–150.75, with a commission of 0.10
percent of the transaction value. The Taiwan Stock Exchange charges a tax of 0.30 percent
of the value traded from the seller. A bank is quoting the TWD/EUR exchange rate as
32.8675–32.8800. How many euros will the French institutional investor receive on selling
the shares? [2 marks]
