Chapter 18 ◼ International Financial Management 595
10. Forward rates. The Wall Street Journal lists forward rates for Japanese yen. Say that the
current listings are:
One-month forward rate (indirect) 103.17
Three-month forward rate (indirect) 102.68
Six-month forward rate (indirect) 101.88
First, is the anticipated inflation rate higher or lower in Japan compared to that in the
United States? Second, if the current indirect rate is 103.37, what do the six-month rate and
the current rate imply about the relative difference in the anticipated annual inflation rates?
Finally, using the current indirect rate and the six-month forward rate, determine the annual
anticipated inflation rates for Japan if the U.S. inflation rate is anticipated to be 3.45%.
ANSWER
Forward indirect rates:
11. Real rates. Determine what the real interest rates are in the following countries, given their
nominal interest rates and inflation rates:
Canada: Inflation is 4.5%, and the nominal risk-free interest rate is 6.0%
Switzerland: Inflation is 1.25%, and the nominal risk-free interest rate is 3.75%
United States: Inflation is 3%, and the nominal risk-free interest rate is 4.50%
ANSWER:
Using the simple approximate approach
596 Brooks ◼ Financial Management: Core Concepts, 4e
© 2018 Pearson Education, Inc.
Switzerland: 0.0375 Nom RF – 0.0125 INF = 0.025 or 2.5% real
U.S.: 0.045 Nom RF – 0.030 INF = 0.015 or 1.5% real
Using the Fisher Effect approach
Canada (1.06 / 1.045) – 1 = 0.01435 or 1.435% real
Switzerland: (1.0375 / 1.0125) – 1 = 0.024691 or 2.469% real
U.S.: (1.045 / 1.030) – 1 = 0.01456 or 1.456 % real
Chapter 18 ◼ International Financial Management 599
© 2018 Pearson Education, Inc.
New cost of 5,000 winter hats
5,000 × [Ru 1,375 × ($0.0364 / Ru 1.00)] = $ 250,250
Exposure loss: $ 5,362.5
17. Operating exposure. Copy-Cat, Incorporated has signed a deal to make vintage Nissan 240-Z
sports cars for the next three years. The cars will be built in Japan and shipped to the United
States for sale. The current indirect rate is 103.50 for dollars and yen. The inflation rate for
parts and labor in Japan is anticipated to be 2.5% over the next three years, and the overall
inflation rate for Japan is anticipated to be 3.5% over the next three years. The overall
inflation rate in the United States is expected to be 4.0% over the next three years. (The
stated rates are on an annual basis.) If Copy-Cat plans on selling 500 cars a year at an initial
cost price of $45,000 and the cost of production is ¥4,036,500, what is the annual profit in
real dollars for Copy-Cat? Assume that it takes one year for production and that all sales
revenues and production costs occur at the end of the year. Is this profit rising or falling each
year? Why?
ANSWER
600 Brooks ◼ Financial Management: Core Concepts, 4e
© 2018 Pearson Education, Inc.
$ 45,000 (1.04)3 = $ 50,618.88
Cost
¥ 4,036,500 (1.025) / 103.0024 = $40,168.12
¥ 4,036,500 (1.025)2 / 102.5072 = $41,371.22
¥ 4,036,500 (1.025)3 / 102.0144 = $42,610.35
$ Profits are rising as the revenue is growing at a higher inflation rate than the production costs
despite the weakening dollar against the yen.
604 Brooks ◼ Financial Management: Core Concepts, 4e
© 2018 Pearson Education, Inc.
NPV = ∑(PV Column)➔ $ 957,658.50, Expand
