A US based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen ¥) Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent US dollars):
Mexico: $80 million excess cash to be invested (lent)
Japan: $60 million funds to be raised (borrowed)
The management gathered the following data:
Currency
Item USS MP ¥
Spot exchange raes MP 11.60/US$ ¥108.25/US$
Forecast percent change -3.0% +1.5%
Interest rates
Nominal
Euromarket 4.00% 6.20% 2.00%
Domestic 3.75% 5.90% 2.15%
Effective
Euromarket
Domestic