Euromarket investment and fund raising A U.S.-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 U.S. dollars):
Mexico: $80 million excess cash to be invested (lent)
Japan: $60 million funds to be raised (borrowed)
The management gathered the following data:
Item
Currency
US $
MP
¥
Spot exchange rates
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
_________
Determine the effective interest rates for all three currencies in both the Euromarket and the domestic market; then indicate where the funds should be invested and raised. (Note: Assume that because of local regulations, a subsidiary is not permitted to use the domestic market of any other subsidiary.)
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