Excel

1,275.00 x 0.81000 dollars per euro

= $1,032.75

Calculate the rate of return:

$32.75 / $1,000.00

= 3.275% per 180 days

Annual return = 6.55%

This is higher than return on U.S. security, so Spanish securities have higher returns after adjusting for exchange rates.

h. What is purchasing power parity? If grapefruit juice costs $2.00 a liter in the United States and purchasing power parity holds, what should be the price of grapefruit juice in Spain?

Purchasing power parity implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.

Spot Rate = Ph/Pf

0.800000 = $2.00 / Pf

Pf = 2.500 euros

i. What impact does relative inflation have on interest rates and exchange rates?

Lower inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms. However, currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries, so the true interest cost increases over the life of the loan.

j. Briefly discuss the international capital markets.

Eurodollar markets

Dollars held outside the U.S.

Mostly Europe, but also elsewhere

International bonds

Foreign bonds: Sold by foreign borrower, but denominated in the currency of the country of issue.

Eurobonds: Sold in country other than the one in whose currency it is denominated.

k. To what extent do average capital structures vary across different countries?

Early studies suggested that average capital structures varied widely among the large industrial countries. However, a recent study, which controlled for...