Question 1
- Answer the following questions based on the stock market data given in the following table.
- Compute the domestic country beta of EDF as well as its world beta. What do these betas measure?
- Suppose the CAC40 stock market is segmented from the rest of the world. Using the CAPM paradigm, estimate the equity cost of capital of EDF.
- If EDF decides to issue a Yankee stock offering by cross-listing new shares directly to US public investors on the NYSE, its shares will be tradable internationally.Again using the CAPM paradigm, estimate EDF’s equity cost of capital under these circumstances.
Correlation Coefficients
|
EDF |
CAC40 |
World |
StdDev(%) |
Avg return (%) |
|
|
EDF |
1.00 |
0.88 |
0.62 |
17 |
? |
|
CAC40 |
1.00 |
0.77 |
13 |
15 |
|
|
World |
1.00 |
11 |
12 |
The above table provides the correlations among Electricite de France (EDF), the French electricity company, the French stock market index known as the CAC40, and the world market index, together with the standard deviations (SD) of returns and the expected returns (). The risk-free rate is 4.5%.
Question 2
- The following exchange rates are available to you to buy or sell.
|
Bank One |
JPY120.00/USD |
|
Bank Two |
CHF1.6000/USD |
|
Bank Three |
JPY80.00/CHF |
Assume you have an initial CHF10,000,000.Can you make a profit via triangular arbitrage?If so, show the steps and calculate the amount of profit in Swiss francs (CHF).
Question 3
- A corporate treasury with operation in New York simultaneously calls Citibank in New York and Barclays in London, where it receives the following quotes at the same time:
|
Citibank NYC |
Barclays London |
|
USD1.3650-70/EUR |
USD1.3649-60/EUR |
Using USD1million or its EUR equivalent and ignoring transaction costs, show how the corporate treasury might make a geographic arbitrage profit with the two different exchange rate quotes.
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