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Questions and Answers of
Corporate Finance
Use T-accounts to explain the difference between the gross and net size of the Eurodollar market.
Create an example of $10 million being deposited in the Eurodollar market by a U.S. manufacturing firm, Motorola. Your example should include at least one interbank transaction before the dollars are
What could be the risks for depositors if they decide to use the Eurocurrency market for their deposits?
What are the IBFs? Why did the Federal Reserve authorize the establishment of the IBFs? Explain.
Suppose you want to infer expected future exchange rates in a less-developed country that has free-market-determined interest rates but does not have a forward exchange market. Is there any other way
a. Show that there is a direct relationship between the forward premium and the "real" interest rate differential between two currencies.b. Under what conditions will the forward premium equal the
Give four reasons why, when interest parity does not hold exactly, we are unable to take advantage of arbitrage to earn profits.
Suppose the one-year interest rate on British pounds is 11 percent, the dollar interest rate is 6 percent, and the current $/£ spot rate is $1.80. a. What do you expect the spot rate to be in one
Assume that the one-year interest rate in the U.S. is 2% and the one-year interest rate in Sweden is 4%, is there a premium or discount on the Swedish krona?
If non tradable goods prices rise faster in country A than in country B, and tradable goods prices remain unchanged, determine whether currency A will appear to be overvalued or undervalued.
Explain why relative purchasing power parity may hold when absolute purchasing power parity does not.
List four reasons why deviations from PPP might occur; then carefully explain how each causes such deviations.
What is the "real exchange rate"? What does the real exchange rate equal if absolute PPP holds?
Distinguish among translation exposure, transaction exposure, and economic exposure. Define each concept and then indicate how they may be interrelated.
The six-month interest rate in the United States is 10 percent; in Mexico it is 12 percent. The current spot rate (dollars per peso) is $0.40.a. What do you expect the six-month forward rate to be?b.
Does an efficient market rule out all opportunities for speculative profits? If so, why? If not, why not?
You are the treasurer of a U.S. firm that has a €1 million commitment due to a German firm in 90 days. The current spot rate is $1.00 per euro, and the 90-day forward rate is $1.11. Ali forecasts
It was reported in the Financial Times that "Toyota suffers a ¥20 billion drop in operating profits for every ¥1 rise (in the exchange rate, yen per dollar) against the dollar." Does this statement
Suppose that the Japanese firm Sanpo will receive $1.5 million from its U.S. sales subsidiary on June 3. Moreover, on June 3 a U.S. bank is due $2.3 million from Sanpo as repayment of a loan. Explain
What could be done if question 1 is modified so that Sanpo owes the $2.3 million on June 13, but the $1.5 million receivable is still scheduled for June 3?
Give an example of how transfer pricing can be used to a. Shift profits to a low-tax subsidiary in Ireland. b. Reduce the tariff on a shipment of computer parts from a subsidiary in Taiwan to a
What is arm's-length pricing?
Suppose a U.S. multinational firm estimates that a $150 million capital expenditure in a new plant in an unstable developing country will have a life of two years before it is confiscated by the
What is a letter of credit? What risks do the parties to a letter of credit take?
Explain how investment flows can be motivated by interest rate differentials and still allow two-way capital flows between countries.
What is the difference between systematic and non-systematic risk? Give examples of both risks.
Explain how portfolio diversification can reduce risk.
Assume that you have a choice of two assets, A and B, and a portfolio of an equal share of the two assets. Assume also that the assets have the following statistics:a. What does the negative
What is an ADR? What are the differences between ADRs and the domestic stocks?
Why would a debtor nation prefer to borrow from a bank rather than the IMF, other things being equal? Can "other things" ever be equal between commercial bank and IMF loans?
How did each of the following contribute to the Asian financial crisis of the late 1990s: external shocks, domestic macroeconomic policy, and domestic financial system flaws?
Explain how the fixed exchange rate arrangement could lead to a financial crisis.
Imagine yourself in a job interview for a position with a large international bank. The interviewer mentions that, recently, the bank has experienced some problem loans to foreign governments. The
Explain what highly leveraged investment practice is. How does it relate to financial crisis?
Suppose that the U.S. is considering devaluing its dollar against a foreign currency to improve the trade balance. What type of currency contracting would have a negative effect on the trade balance?
Suppose that the U.S. is considering devaluing its dollar against a foreign currency to improve the trade balance. What type of pass-through effects would lead to a positive effect on the trade
Suppose that the U.S. is considering devaluing its dollar against a foreign currency to improve the trade balance. Use the absorption approach to explain how the U.S. can improve its trade balance
What is the J-curve? Explain.
How can we use the Marshall-Lerner condition to explain the J-curve effect?
Explain the difference between a closed economy and an open economy. Explain also how the pursuit of internal equilibrium will be different between two types of the economies.
Consider the IS-LM-BP model of an open economy with a constant price level, perfect asset substitutability, and perfect capital mobility. The economy is initially in both internal and external
From question 2, suppose now that the domestic economy decides to reduce its money supply. a. What are the initial effects of this monetary policy on the goods market, the money market, the foreign
From question 2, suppose now that the domestic government decides to increase the government spending. a. What are the initial effects of this fiscal policy on the goods market, the money market, the
If a country has a surplus balance of payments, what will be the appropriate government policy to restore the balance of payments back to equilibrium? What effects might this have on the country's
What is the international policy coordination? Explain why it is difficult to adopt the international policy coordination in practice.
"Monetary disequilibrium leads to balance of payments problems under fixed exchange rates, and a currency problem under floating exchange rates." Discuss this statement with reference to the monetary
What are the assumptions underlying the monetary approach to the balance of payments? Explain.
Using the monetary approach to the balance of payment to explain how the Bretton Woods system could break down after the U.S. increasing its money supply too fast.
In a perfectly floating exchange rate regime, use the monetary approach to the exchange rate to explain the effect on the dollar price of a Swiss franc ($/SFr) of the following scenarios:a. The
Assume that Mexico and the U.S. are in a fixed exchange rate agreement. Suppose that the Fed increases the money supply by 40%. What would happen to the international reserve position for the U.S.?
In each of the five approaches, list the underlying assumptions (e.g. what is assumed in terms of speed of adjustment in goods markets and financial markets, expectations, asset substitutability, and
Suppose that a central bank buys bonds on the open market and uses money to pay for them, thereby increasing the supply of money and decreasing the supply of bonds. Use the portfolio-balance approach
Explain why a high currency substitution would cause the U.S. dollar exchange rate to depreciate more than the expected level when the Fed increases money supply in the U.S.
Suppose that the Fed unexpectedly decreases the money supply in the U.S. Use the overshooting approach to explain how the spot exchange rate, forward rate, domestic interest rate, and the domestic
Assume that a country increases its domestic money supply. If the "overshooting" theory is correct, how could a central bank prevent the exchange rate from depreciating too much in the short run?
Suppose the U.S. discovers a new technology that will improve its exports. Therefore, there are rumors that this technology will bring the U.S. trade balance from trade deficits to expected long-term
What are the typical features of a project finance deal?
How is WACC calculated?
How are project finance transactions involving the Public Administration organized
Complete the following table by putting an X in the column that corresponds to the following statements:
Referring to the different options given in the table below, calculate the payoffs for lenders and shareholders consequent to the decision to finance on-balance sheet or off-balance sheet for Project
Are the following statements true or false?In Scenario 1 both projects will probably default regardless of whether project financing is used. In Scenario 2 on-balance sheet financing and off-balance
What are the characteristics of sponsors and their approach to project finance deals?
Draw up a typical contractual network for a project finance deal, indicating the parties involved.
In project finance initiatives, the borrower is: a) The sponsor, as "originator" of the deal. b) A specially created company which is financially and legally dependent on the sponsor. c) A specially
The contractor is:a) The company or group of companies that are responsible for plant construction. b) The company or group of companies that provide maintenance for the facilities for a given number
In terms of the use of cash flow generated from project finance deals, the priority is:a) To fund operating costs and service the debt.b) To pay dividends to sponsors.c) To pay parties identified in
Complete the following sentence: With the model, the Public Administration delegates planning and realization of the project to a private party, together with operating management of the facility for
In project finance initiatives, sponsors normally offer:a) Collateral to lenders of the SPV.b) Collateral on their personal assets to lenders of the SPV. c) The assets of the SPV as collateral to
Corporate finance based lending is not the optimal solution for realizing new projects when such initiatives:a) Involve sizeable flows in currencies other than the home currency.b) Are less risky
Contamination risk refers to the possibility that:a) A project won't be realized because other similar projects are already underway.b) Default of the project will jeopardize up-and-running
Co-insurance effect refers to:a) The possibility that mutual benefits emerge for the project and the company.b) The possibility to use the same model for dividing up risk among various project
Industrial sponsors are interested in participating in project finance initiatives:a) To exploit the opportunity to build plants and facilities sold to the SPV. b) To exploit the opportunity to
What is the path followed by project finance in type of markets and underlying risks?
Is there a relationship between development of PPP's in the European Union on the one side and kind of sector, institutional level, and legislation on the other side?
Can you resume the historical evolution of project finance and market segments?
At the beginning, was the presence of a captive market important for project finance development in some sectors?a) No, it wasn't. Initially, project finance developed in sectors without buyers.b)
The evolution of project finance during 1980s and 1990s is characterized by:a) The export of this financing technique to developing countries only.b) The growth in the use of project finance even in
World data about project finance deals from 2003 to 2006 show that energy and power sector absorbed more than 50% of all granted amounts. What is the most likely reason?a) Energy and power is a
Concerning the European market, project finance is most widely used in countries: a) Where applications are less numerous and the institutional and legislative context are less advanced. b) Where
Complete the table below ticking off the relevant phase for each risk.
What are the key contracts in project finance deals?
Describe the objectives of a risk-matrix and explain how it's built.
Discuss the meaning of "shadow toll" and how it can be consider a tool for sharing market risk between the Public Administration and the private counterparty.
List the main characteristics of the financial instruments available for managing interest rate risk and exchange rate risk
Suppose that project sponsors build a facility under a PPP scheme. The public administration pays every cost overrun incurred by the private sponsors during construction and the sponsors fully bear
Risks that arise in the pre-completion phase do not include: a) Technological riskb) Operating riskc) Activity planning risk
Political risk and country risk:a) Are unique because there is no coverage for these risks.b) Can emerge in various forms.c) Is the result of delays or cancellations of permits needed for project
Environmental risk has to do with potential negative impact that the building project could have on the surrounding environment. Therefore: a) This risk category does not depend on the type of
With a turnkey construction contract, the contractor guarantees the SPV:a) The completion date and performance of the plant, but not the cost of the works.b) The performance and the cost of the
Put or pay contractsa) Are used to limit or eliminate technological risk. b) Have the same criticalities as take or pay contracts.c) Are normally drawn up with the SPV's customers.
Is it possible to shift market risk from the SPV to third parties from the outset?a) Yes, with the stipulation of long-term sale contracts.b) Not always, only when a very small number of purchasers
What is a tolling agreement?a) It is a classic take or pay agreement used in the power sector.b) It is a contract with which the toller provides raw material for free in exchange of a service
When the group of sponsors is being formed, which experts are involved and what do they do?
List and define the characteristics of the project documents needed for the industrial development of a project.
What are the key features of the relationship between lawyers and banks during syndication of the financing?
4.Complete the table listing the activities performed by the independent engineer in the various project development phases.
Which factors are taken into account in the final due diligence report issued by the independent engineer?
Who are insurance underwriters? What are the different kinds of insurance underwriters?
What insurance products are most commonly used for project finance deals?
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