Amount expected from US$ receipts is €14,681,054 assuming that forward contracts used.
Invested for two months = €14,681,054 x (1 + (60/360 x 0·0180)) = €14,725,097 say €14,725,000 approximately.
Expected spot rate (E(s)) in 12 months (using purchasing power parity) =
E(s) = 116 x 1·097/1·012 = 125·7
Expected spot rate in 6 months
116 + (125·7 – 116)/2 = 120·9
Investment Amount required = MShs 2,640,000,000/120·9 = €21·84m
Loan finance required = 21·84 – 14·73 = €7·11m
Casasophia Co will need to raise just over €7 million in loans in addition to the receipts from the USA to finance the project in Mazabia. This is on the assumption that the future spot rate follows the purchasing power parity conditions.
[Tutorial Note: Casasophia Co could also consider whether it may be more beneficial to transfer funds directly from the USA to Mazabia instead of converting them into Euros first. This would save transaction costs of converting first into Euros and then into MShs, and also the costs related to using the forward markets. The rates for investing the funds in the USA for two months and the exchange rate between US$ and MShs are not given, but if these were available a comparative analysis could be conducted. In these circumstances the amount of loan finance required would possibly be lower.] |
