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Question 8.1: A U.S. multinational’s Japanese division has an FX operating...

A U.S. multinational’s Japanese division has an FX operating exposure to the yen of 1.60 and a hurdle rate in U.S. dollars of 9%. The risk-free rates are 5% in U.S. dollars and 2% in yen, and the volatility of the yen is 0.08. Assume the linear approximation RA-UIRP condition (global CAPM) in U.S. dollars. The currency beta of the yen is –0.10 and GRP^\$ = 5\%. (a) Find the division’s hurdle rate in yen. (b) How close to the correct hurdle rate is the simple interest rate differential linear approximation?

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