,FIN4802 Assignment 1 | Due 21 May 2025. Step by
Step Calculations Provided.
MULTIPLE CHOICE,ASSURED EXCELLENCE
Question 1 (8 Marks) Mkhize Ltd would like to assess the
country risk of South Africa. Mkhize Ltd has identified various
political and financial risk factors, as shown below. Political Risk
Factor Assigned Rating Assigned Weight Blockage of fund
transfers 7 65% Bureaucracy 3 55% Financial Risk Factor
Assigned Rating Assigned Weight Interest rate 5 30% Inflation 6
20% Exchange rate 5 11% Competition 4 35% Growth 7 30%
Mkhize Ltd has assigned an overall rating of 85 percent to
political risk factors and of 35 percent to financial risk factors.
The investment policy for Mkhize Ltd mentions that the
company can only invest in a country if the country's risk is
below 8.5. Should Mkhize Ltd consider South Africa for
investment? [8] Question 2 (15 marks) Tshepo Molefe is a
foreign exchange dealer with Investec South Africa. He notices
the following quotes: Spot exchange rate ZAR1.3220/BWP 1
year forward exchange rate ZAR1.1492/BWP 1 year BWP
interest rate 5.00% per year 1 year ZAR interest rate 7.50% per
year a) the interest rate parity holding? You may ignore
transaction costs. (3) b) With the aid of calculations, show
whether or not an arbitrage opportunity exists. (2) c) In the
event that there is an arbitrage opportunity, you are required to
demonstrate all the steps that need to be taken to make an
, arbitrage profit. Assume that Tshepo Molefe is authorised to
work with BWP1 000 000 in the Botswana Pula market, or ZAR1
322 000 in the South African Rand market. Compute the
arbitrage profit. (7) Question 3 (27 marks) Greeley plc. is a U.S.-
based multinational firm (MNF) that purchases most of its
materials from Australia and generates a small portion of its
sales from exporting to Australia. Its U.S. sales are denominated
in U.S. dollars, while its Australian sales are denominated in
Australian dollars (AUD). Using the cost and revenue
information shown for Greeley plc. in Exhibit 1 determine how
the costs, revenue, and cash flow items would be affected by
three possible exchange rates for the Australian dollar: (1)
AUD= US$0.75, (2) AUD = US$0.80, or (3) AUD = US$0.85.
(Assume U.S. sales will be unaffected by the exchange rate.)
Assume that Australian AUD earnings will be remitted to the
U.S. parent at the end of the period. Ignore possible tax effects.
Exhibit 1 - Estimated Sales and Expenses for Greeley’s U.S. and
Australian Business Segments (in Millions) U.S. Business
Australian Business Sales $320 AUD 4 Cost of materials $ 50
AUD 200 Operating expenses $ 60 - Interest expenses $ 3 AUD
10 Cash flows $207 -AUD 206 [Total Marks 50]
Question 1 (8 Marks)
Should Mkhize Ltd consider South Africa for investment?
Given:
Step Calculations Provided.
MULTIPLE CHOICE,ASSURED EXCELLENCE
Question 1 (8 Marks) Mkhize Ltd would like to assess the
country risk of South Africa. Mkhize Ltd has identified various
political and financial risk factors, as shown below. Political Risk
Factor Assigned Rating Assigned Weight Blockage of fund
transfers 7 65% Bureaucracy 3 55% Financial Risk Factor
Assigned Rating Assigned Weight Interest rate 5 30% Inflation 6
20% Exchange rate 5 11% Competition 4 35% Growth 7 30%
Mkhize Ltd has assigned an overall rating of 85 percent to
political risk factors and of 35 percent to financial risk factors.
The investment policy for Mkhize Ltd mentions that the
company can only invest in a country if the country's risk is
below 8.5. Should Mkhize Ltd consider South Africa for
investment? [8] Question 2 (15 marks) Tshepo Molefe is a
foreign exchange dealer with Investec South Africa. He notices
the following quotes: Spot exchange rate ZAR1.3220/BWP 1
year forward exchange rate ZAR1.1492/BWP 1 year BWP
interest rate 5.00% per year 1 year ZAR interest rate 7.50% per
year a) the interest rate parity holding? You may ignore
transaction costs. (3) b) With the aid of calculations, show
whether or not an arbitrage opportunity exists. (2) c) In the
event that there is an arbitrage opportunity, you are required to
demonstrate all the steps that need to be taken to make an
, arbitrage profit. Assume that Tshepo Molefe is authorised to
work with BWP1 000 000 in the Botswana Pula market, or ZAR1
322 000 in the South African Rand market. Compute the
arbitrage profit. (7) Question 3 (27 marks) Greeley plc. is a U.S.-
based multinational firm (MNF) that purchases most of its
materials from Australia and generates a small portion of its
sales from exporting to Australia. Its U.S. sales are denominated
in U.S. dollars, while its Australian sales are denominated in
Australian dollars (AUD). Using the cost and revenue
information shown for Greeley plc. in Exhibit 1 determine how
the costs, revenue, and cash flow items would be affected by
three possible exchange rates for the Australian dollar: (1)
AUD= US$0.75, (2) AUD = US$0.80, or (3) AUD = US$0.85.
(Assume U.S. sales will be unaffected by the exchange rate.)
Assume that Australian AUD earnings will be remitted to the
U.S. parent at the end of the period. Ignore possible tax effects.
Exhibit 1 - Estimated Sales and Expenses for Greeley’s U.S. and
Australian Business Segments (in Millions) U.S. Business
Australian Business Sales $320 AUD 4 Cost of materials $ 50
AUD 200 Operating expenses $ 60 - Interest expenses $ 3 AUD
10 Cash flows $207 -AUD 206 [Total Marks 50]
Question 1 (8 Marks)
Should Mkhize Ltd consider South Africa for investment?
Given:
