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Farbucks is thinking of expanding to South Korea. The current indirect rate for dollars and South Korean won is 1025. The inflation rate in South Korea is expected to hover near 0.5% for the next
Verify your answer to Problem 17 using the foreign-currency approach.From Problem 17Investment: A$ 40,000,000Cash Flows: Year 1 – A$ 5,000,000Year 2 – A$ 9,000,000Year 3 – A$ 16,000,000Year 4
Verify your answer to Problem 18 using the foreign-currency approach.From Problem 18Cash Flows: Year 0, initial investment costs Won 82,000,000 per coffee shopYear 1, – Won 25,000,000Year 2, Won
This case requires students to consider business and political risks associated with international business operations. It requires them to use techniques illustrated in the chapter to solve basic
On the day you arrive in New Zealand, the exchange rate for U.S. dollars and New Zealand dollars is $1:2.25 NZ$. While you remain in New Zealand for the next few months, the exchange rate falls to
You plan on traveling to South Korea and China on a business trip. You will first stop in Korea, where the current direct exchange rate is $1: 1243.78SK Won. You will next stop in China, where the
On-Line Currency, Incorporated is an online currency exchange company that will immediately convert and credit your bank account based on its published rates. Being the smart finance major that you
The Wall Street Journal lists forward rates for Euros. Say that the current listings are:1-month forward rate (indirect) 0.70253-month forward rate (indirect) 0.71456-month forward rate (indirect)
Kalamazoo Marine wants to expand its operations to New Zealand. The current indirect exchange rate is 1.75 for U.S. and New Zealand dollars. The anticipated inflation rate is 3.8% in the United
1. What advantages does General Electric seek to attain from its international business activities?2. What actions is it taking to gain these advantages from its international activities?3. What
1. What are the pros and cons of outsourcing?2. How does outsourcing affect U.S. consumers? U.S. producers?3. Longer term, what is the likely impact of outsourcing on American jobs?4. Several states
1. What was ARCO Chemical’s rationale for globalizing?2. What advantages has ARCO Chemical realized from its global operations?3. What threats have arisen from ARCO Chemical’s globalizing
1. What might explain the candidates’ and Democratic Party’s reversal of position on free trade? Which voting constituencies would be most likely to reject free trade? Why?2. What leverage do the
a. What are the various categories of multinational firms?b. What is the motivation for international expansion of firms within each category?
a. How does foreign competition limit the prices that domestic companies can charge and the wages and benefits that workers can demand?b. What political solutions can help companies and unions avoid
a. What factors appear to underlie the Asian currency crisis?b. What lessons can we learn from the Asian currency crisis?
a. What is an efficient market?b. What is the role of a financial executive in an efficient market?
a. What is the capital asset pricing model?b. What is the basic message of the CAPM?c. How might a multinational firm use the CAPM?
Why might total risk be relevant for a multinational corporation?
A memorandum by Labor Secretary Robert Reich to President Bill Clinton suggested that the government penalize U.S. companies that invest overseas rather than at home. According to Reich, this kind of
Are multinational firms riskier than purely domestic firms? What data would you need to address this question?
Is there any reason to believe that MNCs may be less risky than purely domestic firms? Explain.
In what ways do financial markets grade government economic policies?
1. In a satirical petition on behalf of French candlemakers, Frederic Bastiat, a French economist, called attention to cheap competition from afar: sunlight. A law requiring the shuttering of windows
1. What were the origins of the Asian currency crisis?2. What role did expectations play in the Asian currency crisis?3. How did the appreciation of the U.S. dollar and depreciation of the yuan
1. What was the impetus for Argentina's currency board system?2. How successful was Argentina's currency board?3. What led to the downfall of Argentina's currency board?4. What lessons can we learn
1. How did China and Japan manage to weaken their currencies against the dollar?2. Why did the U.S. dollar and U.S. Treasury bonds fall in response to the G7 statement?3. What is the link between
1. Why is China trying to hold down the value of the yuan? What evidence suggests that China is indeed pursuing a weak currency policy?2. What benefits does China expect to realize from a weak
Describe how these three typical transactions should affect present and future exchange rates:a. Seagram imports a year's supply of French champagne. Payment in French francs is due immediately.b.
For each of the following six scenarios, state whether the value of the dollar will appreciate, depreciate, or remain the same relative to the Japanese yen. Explain each answer. Assume that exchange
The Fed adopts an easier monetary policy. How is this likely to affect the value of the dollar and U.S. interest rates?
Comment on the following headline from the New York Times. ''Germany Raises Interest Rate and Value of Dollar Declines'' (October 10, 1997).
On November 28, 1990, Federal Reserve Chairman Alan Greenspan told the House Banking Committee that despite possible benefits to the U.S. trade balance, ''a weaker dollar also is a cause for
Many Asian governments have attempted to promote their export competitiveness by holding down the value of their currencies through foreign exchange market intervention.a. What is the likely impact
As mentioned in the chapter, Hong Kong has a currency board that fixes the exchange rate between the U.S. and H.K. dollars.a. What is the likely consequence of a large capital inflow for the rate of
In 1994, an influx of drug money to Colombia coincided with a sharp increase in its export earnings from coffee and oil.a. What was the likely impact of these factors on the value of the Colombian
On August 8, 2000, Zimbabwe changed the value of the Zim dollar from Z$38/US$ to Z$50/US$.a. What was the original U.S. dollar value of the Zim dollar? What is the new U.S. dollar value of the Zim
In early August 2002 (the exact date is a state secret), North Korea reduced the official value of the won from $0.465 to $0.0067. The black market value of the won at that time was $0.005.a. By what
On Friday, September 13, 1992, the lira was worth DM 0.0013065. Over the weekend, the lira devalued against the DM to DM 0.0012613.a. By how much had the lira devalued against the DM?b. By how much
1. What are the current exchange rate regimes of the BRIC economies?2. Why has Brazil changed its exchange rate regime over the years?3. What variable affects the Russian ruble?4. By how much did
1. What are competitive currency devaluations? What triggered them in 2003?2. What mechanisms are used to create competitive devaluations?3. What is QE2, and how does it affect the value of the U.S.
1. Explain the differing initial and subsequent reactions of the euro to news about the European Central Bank's monetary policy.2. How does a strong pound reduce the threat of imported inflation and
1. Discuss the pros and cons for Britain's joining the EMU.2. Commentators pointed to the fact that many people in Britain have variable rate mortgages, as opposed to the fixed-rate mortgages more
1. What event initially precipitated the Greek crisis?2. Why was Greece in so much trouble?3. What problems in Greece highlighted wider problems in the Eurozone?4. How did the Greek crisis affect the
1. Why was Ireland in trouble?2. What happened to Irish debt? To Irish bond ratings? Interest rates?3. How did the Irish crisis highlight problems with the Eurozone?4. What must Ireland do to solve
a. What are the five basic mechanisms for establishing exchange rates?b. How does each work?c. What costs and benefits are associated with each mechanism?d. Have exchange rate movements under the
The experiences of fixed exchange rate systems and targetzone arrangements have not been entirely satisfactory.a. What lessons can economists draw from the breakdown of the Bretton Woods system?b.
How did the European Monetary System limit the economic ability of each member nation to set its interest rate to be different from Germany's?
Historically, Spain has had high inflation and has seen its peseta continuously depreciate. In 1989, however, Spain joined the EMS and pegged the peseta to the DM. According to a Spanish banker, EMS
In discussing the European Monetary Union, a recent government report stressed a need to make the central bank accountable to the ''democratic process.'' What are the likely consequences for price
Comment on the following statement: ''With monetary union, the era of protection for European firms and workers has come to an end.''
Comment on the following statement: ''The French view European Monetary Union as a way to break the Bundesbank's dominance in setting monetary policy in Europe.''
During the currency crisis of September 1992, the Bank of England borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78, or $1.912. It sold these DM in the foreign exchange market
Suppose the central rates within the ERM for the French franc and DM are FF 6.90403: ECU 1 and DM 2.05853: ECU 1, respectively.a. What is the cross-exchange rate between the franc and the mark?b.
A Dutch company exporting to France had FF 3 million due in 90 days. Suppose that the spot exchange rate was FF 1 = DFl 0.3291.a. Under the exchange rate mechanism, and assuming central rates of FF
Panama adopted the U.S. dollar as its official paper money in 1904. Currently, $400 million to $500 million in U.S. dollars is circulating in Panama. If interest rates on U.S. Treasury securities are
By some estimates, $185 billion to $260 billion in currency is held outside the United States.a. What is the value to the United States of the seignorage associated with these overseas dollars?
1. Suppose the tariff were levied solely on imported crude. In an integrated world economy, who would be hurt? Who would benefit? Why? What would be the longer-term consequences?2. If a $10/barrel
1. How were financial markets likely to respond to President Carter’s lecture? Explain.2. At the time President Carter made his remarks, the inflation rate was running at about 10% annually and
a. What is purchasing power parity?b. What are some reasons for deviations from purchasing power parity?c. Under which circumstances can purchasing power parity be applied?
One proposal to stabilize the international monetary system involves setting exchange rates at their purchasing power parity rates. Once exchange rates were correctly aligned (according to PPP) each
Comment on the following statement. ''It makes sense to borrow during times of high inflation because you can repay the loan in cheaper dollars.''
From 1982 to 1988, Peru and Chile stand out as countries whose interest rates were not consistent with their inflation experience. Specifically, Peru's inflation and interest rates averaged about
From 1982 to 1988, a number of countries (e.g., Pakistan, Hungary, Venezuela) had a small or negative interest rate differential and a large average annual depreciation against the dollar. How would
In early 1989, Japanese interest rates were about 4 percentage points below U.S. rates. The wide difference between Japanese and U.S. interest rates prompted some U.S. real estate developers to
In early 1990, Japanese and German interest rates rose while U.S. rates fell. At the same time, the yen and DM fell against the U.S. dollar. What might explain the divergent trends in interest rates?
In late December 1990, one-year German Treasury bills yielded 9.1%, whereas one-year U.S. Treasury bills yielded 6.9%. At the same time, the inflation rate during 1990 was 6.3% in the United States,
The spot rate on the euro is $1.39, and the 180-day forward rate is $1.41. What are possible reasons for the difference between the two rates?
German government bonds, or Bunds, currently are paying higher interest rates than comparable U.S. Treasury bonds. Suppose the Bundesbank eases the money supply to drive down interest rates. How is
In 1993 and early 1994, Turkish banks borrowed abroad at relatively low interest rates to fund their lending at home. The banks earned high profits because rampant inflation in Turkey forced up
From base price levels of 100 in 2000, Japanese and U.S. price levels in 2003 stood at 102 and 106, respectively.a. If the 2000 $:¥ exchange rate was $0.007692, what should the exchange rate be in
Two countries, the United States and England, produce only one good wheat. Suppose the price of wheat is $3.25 in the United States and is £1.35 in England.a. According to the law of one price, what
In early 1996, the short-term interest rate in France was 3.7% and forecast French inflation was 1.8%. At the same time, the short-term German interest rate was 2.6% and forecast German inflation was
Suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. Meanwhile, the expected inflation rate in France is 12%, and the English interest rate is 14%. To the nearest whole
Chase Econometrics has just published projected inflation rates for the United States and Germany for the next five years. U.S. inflation is expected to be 10% per year, and German inflation is
During 1995, the Mexican peso exchange rate rose from Mex$5.33/US$ to Mex $7.64/US$. At the same time, U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%.a. By how
Assume that the interest rate is 16% on pounds sterling and 7% on euros. At the same time, inflation is running at an annual rate of 3% in Germany and 9% in England.a. If the euro is selling at a
Suppose the spot rates for the euro, pound sterling, and Swiss franc are $1.52, $2.01, and $0.98, respectively. The associated 90-day interest rates (annualized) are 8%, 16%, and 4%; the U.S. 90-day
Suppose that three-month interest rates (annualized) in Japan and the United States are 7% and 9%, respectively.If the spot rate is ¥142: $1 and the 90-day forward rate is ¥139: $1,a. Where would
Here are some prices in the international money markets:Spot rate = $1.46 : €Forward rate (one year) = $1.49: €Interest rate (€) = 7% per year Interest rate ($) = 9% per yeara. Assuming no
Suppose today's exchange rate is $1.55/€. The six-month interest rates on dollars and euros are 6% and 3%, respectively. The six-month forward rate is $1.5478. A foreign exchange advisory service
Suppose that on January 1, the cost of borrowing French francs for the year is 18%. During the year, U.S. inflation is 5%, and French inflation is 9%. At the same time, the exchange rate changes
1. What is the link between South Korea’s currency market interventions and its growing foreign exchange reserves?2. What is the annualized cost to the Bank of Korea of maintaining $205.5 billion
1. In what way is Warren Buffett’s plan the equivalent of a tariff? What would be its likely impact on American consumers?2. What would be the likely effect of Mr. Buffett’s plan on U.S.
a. As the value of the U.S. dollar rises, what is likely to happen to the U.S. balance on current account? Explain.b. What is likely to happen to the value of the dollar as the U.S. current-account
Suppose Lufthansa buys $400 million worth of Boeing jets in 2010 and is financed by the U.S. Eximbank with a five year loan that has no principal or interest payments due until 2011. What is the net
a. What happens to Mexico’s ability to repay its foreign loans if the United States restricts imports of Mexican agricultural produce?b. Suppose Brazil starts welcoming foreign investment with open
During the 1990s, Mexico and Argentina went from economic pariahs with huge foreign debts to countries posting strong economic growth and welcoming foreign investment. What would you expect these
Suppose the trade imbalances of the 2000s largely disappear during the next decade. What is likely to happen to the huge global capital flows of the 2000s? What is the link between the trade
In the early 1990s, Japan underwent a recession that brought about a prolonged slump in consumer spending and capital investment. (Some estimate that in 1994 only 65% of Japan’s manufacturing
According to the World Competitiveness Report 1994, with freer markets, Third World nations now are able to attract capital and technology from the advanced nations. As a result, they can achieve
How would each of the following transactions show up on the U.S. balance-of-payments accounts?a. Payment of $50 million in Social Security to U.S. citizens living in Costa Ricab. Sale overseas of
Set up the double-entry accounts showing the appropriate debits and credits associated with the following transactions:a. ConAgra, a U.S. agribusiness, exports $80 million of soybeans to China and
During the year, Japan had a current-account surplus of $98 billion and a financial-account deficit, aside from the change in its foreign exchange reserves, of $67 billion.a. Assuming the preceding
The following transactions (expressed in US$ billions) take place during a year. Calculate the U.S. merchandise-trade, current-account, financial-account, and official reserves balances.a. The United
During the Reagan era, 1981â€“1988, the U.S. current account moved from a tiny surplus to a large deficit. The following table provides U.S. macroeconomic data for that period.a. Based on these
1. What are key elements of country risk in Zimbabwe?2. How has increased country risk affected Zimbabwe’s economy and living standards?3. By how much is the Zim dollar at its official rate
What are some indicators of country risk? Of country health?
What can we learn about economic development and political risk from the contrasting experiences of East and West Germany; North and South Korea; and China and Taiwan, Hong Kong, and Singapore?
What role do property rights and the price system play in national development and economic efficiency?

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