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Problem Set #4
Problem Set #4
Loan from Goldman Sach: $1 million, coupon rate of 5%, paid at the end of year,
one-year duration
Loan from BNI Bank: Rp10 billion, coupon rate of 15%, duration of one year,
interest and principal are paid at the end of year.
Suppose spot rate is Rp9,000/$. Interest rate in Indonesia and US are 10% and 5%
respectively. Inflation in Indonesia and US are 8% and 4% respectively. Evaluate the two
financing proposals, which one you recommend?
2.
a. Suppose an MNC predicts that Rupiah is going to depreciate against US$. Should the
asset of Indonesian subsidiary be reduced or increased? Explain.
3. MNC from Denmark feels that their cost of capital is too high. To be able to compete
with other MNCs, internationaization of cost of capital was introduced.
a. Explain carefully why internationalizing cost of capital leads to lower cost of
capital.
b. Show how to observe empirically that such objective is reached.
4.
a. Explain main difference(s) between eurocurrency loans and eurobonds.
b. Explain eurodollar market, why is this market growing fast?
6. Explain how parallel loan or back to back loan can be used to circumvent capital
restriction.
7. Comment on the following statement, One should borrow in those currencies expected
to depreciate and invest in those expected to appreciate. (hints: relate to efficient market)
8. Explain the following statement. The growth of Eurobond has been largely driven by
swap transaction.
9. Tiger Car, a Japanese car manufacturer, is pondering to move its factory to US. Labor
cost would rise by Yen33,000 per-car. The time in transit will be reduced by 65 days. Tiger
car sells for Yen 82,500 and Tiger cost of fund is 12.5%. Should they move the plant to
US?
10. Explain:
a. Forfaiting
b. Countertrade
c. Securitization
11. Merlin Corp of the US imports raw material from Indonesia on terms of 2/10 net 30.
Merlin expects a 36% devaluation of the Indonesian Rupiah at any moment. Should
Merlin take discount? Discuss aspects of the problem.