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multinational business finance
Questions and Answers of
Multinational Business Finance
Burton Manufacturing. Jason Stedman is the director of finance for Burton Manufacturing, a U.S.-based manufacturer of handheld computer systems for inventory management. Burton’s system combines a
Micca Metals, Inc. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials that are used in a
Terry McDermott and Aidan. Aidan—the Irelandbased company discussed in this chapter—has concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of£3,000,000
ABB Group. On May 1, ABB Group, a wholly owned subsidiary of Asia Power Generation Corporation(Philippines), sold a 20-megawatt transformer to Roma Italia SpA of Italy for €5,000,000, payable as
Milan Pharmaceuticals SpA’s Intra-Company Hedging.Milan Pharmaceuticals SpA is an Italian multinational that has developed a vaccine for the Ebola virus. It recently established a new subsidiary in
Malaysian Island Resort. Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one year from now. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is
Argentine Float. The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002, the Argentine peso was floated. On January 29, 2003, it was trading at
Derek Tosh and Yen-Dollar Parity. Derek Tosh is attempting to determine whether U.S./Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward
Chan’s Homes: Hong Kong to Toronto. Albert Chan owns homes in Toronto, Canada and Hong Kong, China. He travels between the two cities at least four times a year. Because of his frequent trips, he
Starbucks (Croatia). Starbucks opened its first store in Zagreb, Croatia, in October 2010. In Zagreb, the price of a tall vanilla latte is 25.70 Croatian kunas (kn or HRK). In New York City, the
Hyundai’s Pass-Through. Assume that the export price of a Hyundai Sonata from Seoul, South Korea, is 23,460,000. It exports the car to Malaysia. The exchange rate is 279.48/RM. The forecast
Kamada: CIA Japan (A). Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities.He wants to invest $5,000,000 or its yen equivalent in
Kamada: UIA Japan (B). Takeshi Kamada, Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and that both dollar and yen interest rates have remained relatively fixed over
Copenhagen Covered (A). Heidi Høi Jensen, a foreign exchange trader at JPMorgan Chase, can invest$5 million, or the foreign currency equivalent of the bank’s short-term funds, in a covered
Copenhagen Covered (B). Heidi Høi Jensen is now evaluating the arbitrage profit potential in the same market after interest rates change. (Note that any time the difference in interest rates does
Copenhagen Covered (C). Heidi Høi Jensen is again evaluating the arbitrage profit potential in the same market after another change in interest rates. (Remember that any time the difference in
Casper Landsten—CIA (A). Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short-term money market investment and wonders
Casper Landsten—UIA (B). Casper Landsten, using the same values and assumptions as in Problem 6.12, decides to seek the full 4.800% return available in U.S. dollars by not covering his forward
Casper Landsten—Thirty Days Later. One month after the events described in Problems 6.12 and 6.13, Casper Landsten once again has $1 million (or its Swiss franc equivalent) to invest for three
Statoil’s Arbitrage. Statoil, the national oil company of Norway, is a large, sophisticated, and active participant in both the currency and petrochemical markets.Although it is a Norwegian
Trans-Atlantic Quotes. Separated by more than 3,000 nautical miles and five time zones, money and foreign exchange markets in both London and New York are very efficient. The following information
Chamonix Rentals. You are planning a ski vacation to Mt. Blanc in Chamonix, France, one year from now. You are negotiating the rental of a chateau. The chateau’s owner wishes to preserve his real
East Asiatic–Thailand. The East Asiatic Company(EAC), a Danish company with subsidiaries throughout Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost
Maltese Falcon: The Black Bird. Imagine that the mythical solid gold falcon, initially intended as a tribute by the Knights of Malta to the King of Spain in appreciation for his gift of the island of
Clayton Moore’s Money Fund. Clayton Moore is the manager of an international money market fund managed out of London. Unlike many money funds that guarantee their investors a near risk-free
Chile Copper Mining Group (Chile). Chile Copper Mining Group, headquartered in Santiago, Chile, is one of the largest copper mining firms in the world.On January 1st, when the spot exchange rate is
Volvo of Sweden’s XC90 Export Pricing Analysis.Volvo Sweden, a leading auto manufacturer in Sweden, was scheduled to launch a new variant of the XC90 SUV in 2013 and was in the midst of generating
Big Mac Index Updated. Use The Economist’s website to find the latest edition of the Big Mac Index of currency overvaluation and undervaluation. (You will need to do a search for “Big Mac
Purchasing Power Parity Statistics. The Organisation for Economic Co-operation and Development(OECD) publishes detailed measures of prices and purchasing power for its member countries. Go to the
International Interest Rates. A number of websites publish current interest rates by currency and maturity.Use the Financial Times website listed here to isolate the interest rate differentials
World Bank’s International Comparison Program.The World Bank has an ongoing research program that focuses on the relative purchasing power of 107 different economies globally. Download the latest
Explain how foreign currency futures are quoted, valued, and used for speculation purposes.
Explore the buying and writing of foreign currency options in terms of risk and return.
Describe how option values are composed of intrinsic and time-based value elements.
Examine how foreign currency option values change with exchange rate movements, interest rate movements, and other option pricing components over time.
Foreign Currency Futures. What is a foreign currency future?
Futures Terminology. Explain the meaning and probable significance for international business of the following contract specifications:a. notional principalb. marginc. marked-to-market
Long and a Short. How can foreign currency futures be used to speculate on the exchange rate movements, and what role do long and short positions play in that speculation?
Futures and Forwards. How do foreign currency futures and foreign currency forwards compare?
Hedging with Futures. What are the disadvantages of using futures contracts to hedge a firm’s exposure?
Options Versus Futures. Explain the difference between foreign currency options and futures, and when either might be most appropriately used.
Put Contract Elements. The CME exchange-traded American put option has a contract size of €125,000;the December puts with a strike price of 1.2900 are now quoted at 0.0297. Explain what these
Premiums, Prices, and Costs. What is the difference between the price of an option, the value of an option, the premium on an option, and the cost of a foreign currency option?
Writing Options. Why would anyone write an option, knowing that the gain from receiving the option premium is fixed but the loss, if the underlying price goes in the wrong direction, can be extremely
Decision Prices. Once an option has been purchased, only two prices or rates are part of the holder’s decision-making process. Which two and why?
Option Cash Flows and Time. The cash flows associated with a call option on euros by a U.S. dollar-based investor occur at different points in time. What are they, and how much does the time element
Option Valuation. The value of an option is stated to be the sum of its intrinsic value and its time value.Explain what is meant by these terms.
Time Value Deterioration. An option’s value declines over time, but it does not do so evenly. Explain what that means for option valuation.
Option Values and Money. Options are often described as in-the-money, at-the-money, or outof-the-money. What does that mean, and how is it determined?
Option Pricing and the Forward Rate. What is the relationship or link between the forward rate and the foreign currency option premium?
Option Deltas. What is an option delta? How does it change when the option is in-the-money, at-themoney, or out-of-the-money?
Historic Versus Implied Volatility. What is the difference between a historic volatility and an implied volatility?
Mariko Fujimoto at Sakura Bank. Mariko Fujimoto, a currency trader for Tokyo-based Sakura Bank, uses the following futures quotes on the British pound (£)to speculate on the value of the pound.a. If
Laura Cervantes. Laura Cervantes, the currency speculator we met in this chapter, sells eight June futures contracts for 500,000 pesos at the closing price quoted in Exhibit 7.1.a. What is the value
Cece Cao in Jakarta. Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate. The current spot
Hoffman Bank, Basel (A). Stefan Boerig trades currency for the Hoffman Bank in Basel, Switzerland.Stefan has 10 million Swiss francs (SF) to begin with, and he must state all profits at the end of
Hoffman Bank, Basel (B). Stefan Boerig of Hoffman Bank now believes that the Swiss franc will appreciate against the British pound in the coming 3-month period. He has £250,000 to invest. The
Kiko Peleh’s Puts. Kiko Peleh writes a put option on Japanese yen with a strike price of $0.008000/¥(¥125.00/$) at a premium of 0.0080¢ per yen and with an expiration date six months from now.
Chavez S.A. Chavez S.A., a Venezuelan company, wishes to borrow $8,000,000 for eight weeks. A rate of 6.250% per annum is quoted by potential lenders in New York, Great Britain, and Switzerland
Valdor Capital. Baradan Kuppusamy works as a currency speculator for Valdor Capital headquartered in Kuala Lumpur. His most recent speculative position is to profit from his expectation that the Thai
Henrik’s Options. Assume Henrik writes a call option on euros with a strike price of $1.2500/€ at a premium of 3.80 cents per euro ($0.0380/€) and with an expiration date three months from now.
Baker Street. Arthur Doyle is a currency trader for Baker Street, a private investment house in London.Baker Street’s clients are a collection of wealthy private investors who, with a minimum stake
Bambang Pamungkas at CCB Bank. Bambang Pamungkas works for CCB Bank Currency Trading Desk in Montreal, Canada. Bambang is something of a contrarian – as opposed to most of the forecasts, he
U.S. Dollar/Euro. The table below indicates that a 1-year call option on euros at a strike rate of $1.25/€will cost the buyer $0.0632/€, or 4.99%. But that assumed a volatility of 12.000% when
U.S. Dollar/Japanese Yen. What would be the premium expense, in home currency, for a Japanese firm to purchase an option to sell 750,000 U.S. dollars, assuming the initial values listed in the FX
Euro/Japanese Yen. A French firm is expecting to receive JPY 10.4 million in 90 days as a result of an export sale to a Japanese semiconductor firm. What will it cost, in total, to purchase an option
U.S. Dollar/British Pound. Assuming the same initial values for the dollar/pound cross-rate in the FX Option Pricing workbook, how much more would a call option on pounds be if the maturity was
Euro/British Pound. How would the call option premium change on the right to buy pounds with euros if the euro interest rate changed to 4.000%from the initial values listed in the FX Option Pricing
Financial Derivatives and the ISDA. The International Swaps and Derivatives Association (ISDA)publishes a wealth of information about financial derivatives, their valuation and their use, in addition
Risk Management of Financial Derivatives. If you think this book is long, take a look at the freely downloadable U.S. Comptroller of the Currency’s handbook on risk management related to the care
Garman-Kohlhagen Option Formulation. For those brave of heart and quantitatively adept, check out the following Internet site’s detailed presentation of the Garman-Kohlhagen option formulation used
Chicago Mercantile Exchange. The Chicago Mercantile Exchange trades futures and options on a variety of currencies, including the Brazilian real. Use the following site to evaluate the uses of these
Implied Currency Volatilities. The single unobservable variable in currency option pricing is the volatility, since volatility inputs are the expected standard deviation of the daily spot rate for
Montreal Exchange. The Montreal Exchange is a Canadian exchange devoted to the support of financial derivatives in Canada. Use its website to view the latest on MV volatility—the volatility of the
Explain interest rate foundations, including interest rate calculations and reference rates.
Define the cost of debt for both governments (sovereign borrowers) and corporate borrowers.
Analyze interest rate risk and examine a variety of methods for its management.
Explore the use of interest rate futures and forward rate agreements in managing interest rate risk.
Examine the use of interest rate swaps to manage the interest rate risks of multinational firms.
Reference Rates. What is an interest “reference rate,”and how is it used to set rates for individual borrowers?
My Word Is My LIBOR. Why has LIBOR played such a central role in international business and financial contracts? Why has this been questioned in recent debates over its reported value?
Credit Risk Premium. What is a credit risk premium?
Credit and Repricing Risk. From the point of view of a borrowing corporation, what are credit and repricing risks? Explain the steps a company might take to minimize both.
Credit Spreads. What is a credit spread? What credit rating changes have the most profound impact on the credit spread paid by corporate borrowers?
Investment Grade Versus Speculative Grade. What do the general categories of investment grade and speculative grade represent?
Sovereign Debt. What is sovereign debt? What specific characteristic of sovereign debt constitutes the greatest risk to a sovereign issuer?
Floating-Rate Loan Risk. Why do borrowers of lower credit quality often find their access limited to floating-rate loans?
Interest Rate Futures. What is an interest rate future?How can they be used to reduce interest rate risk by a borrower?
Interest Rate Futures Strategies. What would be the preferred strategy for a borrower paying interest on a future date if it expected interest rates to rise?
Forward Rate Agreement. How can a firm that has borrowed on a floating-rate basis use a forward rate agreement to reduce interest rate risk?
Swaps and Credit Quality. If interest rate swaps are not the cost of government borrowing, what credit quality do they represent?
LIBOR Flat. Why do fixed-for-floating interest rate swaps never swap the credit spread component on a floating-rate loan?
Debt Structure Swap Strategies. How can interest rate swaps be used by a multinational firm to manage its debt structure?
Cost-Based Swap Strategies. How do corporate borrowers use interest rate or cross-currency swaps to reduce the costs of their debt?
Cross-Currency Swaps. Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars?
Value Swings in Cross-Currency Swaps. Why are there significantly larger swings in the value of a cross-currency swap than in a plain-vanilla interest rate swap?
Unwinding a Swap. How does a company cancel or unwind a swap?
Counterparty Risk. How does organized exchange trading in swaps remove any risk that the counterparty in a swap agreement will not complete the agreement?
T-Bill Yields 2009. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the
TED Spread in the Global Financial Crisis. During financial crises, short-term interest rates will often change quickly (typically up) as indications that markets are under severe stress. The
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