[ishmero2006]

Thanks

[ishmero2006]

I dont understand the comment made, even though i understand the hedging strategies.

[ishmero2006]

Thank you very much. I think I get it now from your explanation.

[ishmero2006]

IThe name of the question is Somax Plc.
Extract: Somax wants to raise funds in Swiss francs for a project.
Exchange Rates
Spot. Sfr 2.3245 – 2.3300/E
6m foward Sfr 2.2955 – 2.3009/E

Somax can borrow in Sfr at floating rate of between 5.75% and 6% depending on which form of borrowing is selected(is in the Euro market or the Swiss domestic market).
Sfr Libor is currently 5%.
The interest rate parity theorem may be assumed to hold.
Question:
Estimate the UK sterling cost of capital that Somax should use as the discount rate for its investment in Switzerland.
In their solution they gave the following expression based on the interest rate parity theorem and the mid rate exchange rates;
2.2982= 2.3273X(1+Swiss rate)/(1+UK rate).
They worked this out to get UK rate of 8.25% – 8.5% per annum which I don’t understand.

.

[ishmero2006]

i would want to be part of a group study session for p2.

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