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Questions and Answers of Finance

What indicators would you look for in assessing the political riskiness of an investment in Eastern Europe?
Exhibit 6.8 describes some economic changes that have been instituted by Mexico.a. What are the likely consequences of those changes?b. Who are the winners and the losers from these economic changes?
Many antipoverty activists in the developing world believe that what keeps incomes and living standards from rising as fast as they have in the developed world is an international conspiracy of
For decades, efforts to end world poverty have focused on redistributing wealth, rather than creating it. How successful has this approach been in fostering long-term economic progress?
Comment on the following statement discussing Mexico’s recent privatization: ‘‘Mexican state companies are owned in the name of the people but are run and now privatized to benefit Mexico’s
Between 1981 and 1987, direct foreign investment in the Third World plunged by more than 50%. The World Bank was concerned about this decline and wanted to correct it by improving the investment
In the early 1990s, China decided that by 2000 it would boost its electricity-generating capacity by more than half. To do that, it planned on foreigners’ investing at least $20 billion of the
You have been asked to head up a special presidential commission on the Russian economy. Your first assignment is to assess the economic consequences of the following six policies and suggest
The president of Mexico has asked you for advice on the likely economic consequences of the following five policies designed to improve Mexico’s economic environment. Describe the consequences of
Your friendly foreign exchange trader has given you the following currency cross rates. The quotes are expressed as units of the currency represented in the left-hand column per unit of currency
What risks confront dealers in the foreign exchange market? How can they cope with those risks?
Suppose Credit Suisse quotes spot and 90-day forward rates on the Swiss franc of $0.7957–60, 8–13.a. What are the outright 90-day forward rates that Credit Suisse is quoting?b. What is the
Suppose Dow Chemical receives quotes of $0.009369–71 for the yen and $0.03675–6 for the Taiwan dollar (NT$).a. How many U.S. dollars will Dow Chemical receive from the sale of ¥50 million?b.
Suppose the euro is quoted at 0.6064–80 in London and the pound sterling is quoted at 1.6244-59 in Frankfurt.a. Is there a profitable arbitrage situation? Describe it.b. Compute the percentage
As a foreign exchange trader at Sumitomo Bank, you have a customer who would like spot and 30-day forward yen quotes on Australian dollars. Current market rates areSpot ........ 30-day¥101.37 −
Suppose Air France receives the following indirect quotes in New York: €0.92 − 3 and £ 0.63 − 4. Given these quotes, what range of £/€ bid and ask quotes in Paris will permit arbitrage?
On checking the Telerate screen, you see the following exchange rate and interest rate quotes:a. Can you find an arbitrage opportunity?b. What steps must you take to capitalize on it?c. What is the
Suppose that Carrier Lumber Ltd, a Canadian forest products company, sells lumber to Home Depot. In return, Home Depot will pay Carrier US$1,000,000 in 90 days. At a current exchange rate of
On April 1, the spot price of the British pound was $1.86 and the price of the June futures contract was $1.85. During April the pound appreciated, so that by May 1 it was selling for $1.91. What do
A forward market already existed, so why was it necessary to establish currency futures and currency options contracts?
Suppose that Texas Instruments (TI) must pay a French supplier €10 million in 90 days.a. Explain how TI can use currency futures to hedge its exchange risk. How many futures contracts will TI need
Suppose that Bechtel Group wants to hedge a bid on a Japanese construction project. However, the yen exposure is contingent on acceptance of its bid, so Bechtel decides to buy a put option for the
On Monday morning, an investor takes a long position in a pound futures contract that matures on Wednesday afternoon. The agreed-upon price is $1.78 for £62,500. At the close of trading on Monday,
On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its
Suppose you buy three June PHLX euro call options with a 90 strike price at a price of 2.3 (¢/€).a. What would be your total dollar cost for these calls, ignoring broker fees?b. After holding
A trader executes a ''bear spread'' on the Japanese yen consisting of a long PHLX 103 March put and a short PHLX 101 March put.a. If the price of the 103 put is 2.81(100ths of ¢/¥), while the price
Apex Corporation must pay its Japanese supplier ¥125 million in three months. It is thinking of buying 20 yen call options (contract size is ¥6.25 million) at a strike price of $0.00800 in order
1. Assume that the spot price of the British pound is $1.55, the 30-day annualized sterling interest rate is 10%, the 30-day annualized U.S. interest rate is 8.5%, and the annualized standard
What is an interest rate swap? What is the difference between a basis swap and a coupon swap?
Explain how IBM can use a forward rate agreement to lock in the cost of a one-year $25 million loan to be taken out in six months. Alternatively, explain how IBM can lock in the interest rate on this
Dell Computers wants to borrow pounds, and Virgin Airlines wants to borrow dollars. Because Dell is better known in the United States, it can borrow on its own dollars at 7% and pounds at 9%, whereas
In May 1988, Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6% (the
Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yen at 4.5% or floating-rate dollars
At time t, 3M borrows Â¥12.8 billion at an interest rate of 1.2%, paid semiannually, for a period of two years. It then enters into a two-year yen/dollar swap with Bank of America (BA) on a
Suppose LIBOR3 is 7.93% and LIBOR6 is 8.11%. What is the forward forward rate for a LIBOR3 deposit to be placed in three months?
Suppose that Skandinaviska Ensilden Banken (SEB), the Swedish bank, funds itself with three-month Eurodollar time deposits at LIBOR. Assume that Alfa Laval comes to SEB seeking a one-year, fixed-rate
1. Show how the dollar cost to Chrysler of an engine changed over the range ¥240/$ to ¥100/$.2. Show how Mitsubishi's yen revenue per engine changed over the range ¥240/$ to ¥100/$.3. Suppose at
1. What hedging options are available to DKNY?2. What is the hedged cost of DKNY’s payable using a forward market hedge?3. What is the hedged cost of DKNY’s payable using a money market hedge?4.
What are the basic translation methods? How do they differ?
What factors affect a company's translation exposure? What can the company do to affect its degree of translation exposure?
What alternative hedging transactions are available to a company seeking to hedge the translation exposure of its German subsidiary? How would the appropriate hedge change if the German affiliate's
In order to eliminate all risk on its exports to Japan, a company decides to hedge both its actual and anticipated sales there. To what risk is the company exposing itself? How could this risk be
Your bank is working with an American client who wishes to hedge its long exposure in the Malaysian ringgit. Suppose it is possible to invest in ringgit but not borrow in that currency. However, you
Many managers prefer to use options to hedge their exposure because it allows them the possibility of capitalizing on favorable movements in the exchange rate. In contrast, a company using forward
In January 1988, Arco bought a 24.3% stake in the British oil firm Britoil PLC. It intended to buy a further $1 billion worth of Britoil stock if Britoil were agreeable. However, Arco was uncertain
Sumitomo Chemical of Japan has one week in which to negotiate a contract to supply products to a U.S. company at a dollar price that will remain fixed for one year. What advice would you give
U.S. Farm-Raised Fish Trading Co., a catfish concern in Jackson, Mississippi, tells its Japanese customers that it wants to be paid in dollars. According to its director of export marketing, this
The Montreal Expos are a major-league baseball team located in Montreal, Canada. What currency risk is faced by the Expos, and how can this exchange risk be managed?
General Electric recently had to put together a $50-million bid, denominated in Swiss francs, to upgrade a Swiss power plant. If it won, GE expected to pay subcontractors and suppliers in five
Dell Computer produces its machines in Asia with components largely imported from the United States and sells its products in various Asian nations in local currencies.a. What is the likely impact on
Suppose that at the start and at the end of the year, Bell U.K., the British subsidiary of Bell U.S., has current assets of £1 million, fixed assets of £2 million, and current liabilities of £1
Zapata Auto Parts, the Mexican affiliate of American Diversified, Inc., had the following balance sheet on January 1:The exchange rate on January 1 was Mex$8,000 = $1.a. What is Zapata€™s
A foreign exchange trader assesses the euro exchange rate three months hence as follows:$1.11 with probability 0.25$1.13 with probability 0.50$1.15 with probability 0.25The 90-day forward rate is
An investment manager hedges a portfolio of Bunds (German government bonds) with a six-month forward contract. The current spot rate is €0.84/$, and the 180-day forward rate is €0.81/$. At the
Magnetronics, Inc., a U.S. company, owes its Taiwanese supplier NT$205 million in three months. The company wishes to hedge its NT$ payable. The current spot rate is NT$1 = US$0.03987, and the
Cooper Inc., a U.S. firm, has just invested £500,000 in a note that will come due in 90 days and is yielding 9.5% annualized. The current spot value of the pound is $1.5612, and the 90-day forward
American Airlines is trying to decide how to go about hedging SFr70 million in ticket sales receivable in 180 days. Suppose it faces the following exchange and interest rates.Spot rate:
Madison Inc. imports olive oil from Chilean firms, and the invoices are always denominated in pesos (Ch$). It currently has a payable in the amount of Ch$250 million that it would like to hedge.
1. Why are southern European countries particularly vulnerable to a strong euro?2. How does the relatively high inflation rate in southern Europe add to the problems created by a strong euro?3. In
1. How much rand revenue per ounce was Harmony generating on September 11, 2001? Three years later?2. The average exchange rate during 2001:Q2 was R8.04/$; in 2004:Q2, it was R6.60/$. Compare
1. Why does a rise in the dollar hurt Markel? How does a falling dollar help Markel?2. What does Markel do to hedge its currency risk? Can Markel use hedging to completely eliminate its currency
1. Why does Porsche face more operating exposure than Mercedes or BMW?2. Is Porsche really fully hedged through July 31, 2007? Suppose that gains on all its outstanding options were included in
1. What factors affect Embraer's operating exposure? Why did the real's appreciation reduce Embraer's operating profits?2. Did Embraer decrease or increase its currency risk by hedging its dollar
1. What were the key components of Laker Airways' operating exposure?2. What options did it have to hedge its operating exposure?3. Could Laker have hedged its ''natural'' dollar liability
a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play?b. Describe at least three circumstances under which economic exposure is likely to
The sharp decline of the U.S. dollar between 1985 and 1995 significantly improved the profitability of U.S. firms both at home and abroad.a. In what sense was this profit improvement false
What marketing and production techniques can firms initiate to cope with exchange risk?
What is the role of finance in protecting against exchange risk?
E & J Gallo is the largest vintner in the United States. It gets its grapes in California (some of which it grows itself) and sells its wines throughout the United States. Does Gallo face currency
Chrysler exports vans from the United States to Europe in competition with the Japanese. Similarly, Compaq exports computers to Europe. However, all of Compaq's biggest competitors are American
In 1994, the Singapore dollar rose by 9% in real terms against the U.S. dollar. What was the likely impact of the strong Singapore dollar on U.S. electronics manufacturers using Singapore as an
Di Giorgio International, a subsidiary of California-based Di Giorgio Corporation, processes fruit juices and packages condiments in Turnhout, Belgium. It buys Brazilian orange concentrate in
A U.S. company needs to borrow $100 million for a period of seven years. It can issue dollar debt at 7% or yen debt at 3%.a. Suppose the company is a multinational firm with sales in the United
Huaneng Power International is a large Chinese company that runs coal-fired power plants in five provinces and in Shanghai. It has close to $1.2 billion in U.S. dollar debt whose proceeds it has used
Hilton International is considering investing in a new Swiss hotel. The required initial investment is $1.5 million (or SFr 2.38 million at the current exchange rate of $0.63 = SFr 1). Profits for
A proposed foreign investment involves a plant whose entire output of 1 million units per annum is to be exported. With a selling price of $10 per unit, the yearly revenue from this investment equals
Mucho Macho is the leading beer in Patagonia, with a 65% share of the market. Because of trade barriers, it faces essentially no import competition. Exports account for less than 2% of sales.
In 1990, General Electric acquired Tungsram Ltd., a Hungarian lightbulb manufacturer. Hungary's inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary's currency) was devalued 5%
In 1985, Japan Airlines (JAL) bought $3 billion of foreign exchange contracts at ¥180/$1 over 11 years to hedge its purchases of U.S. aircraft. By 1994, with the yen at about ¥100/$1, JAL had
Nissan produces a car that sells in Japan for ¥1.8 million.On September 1, the beginning of the model year, the exchange rate is ¥150:$1. Consequently, Nissan sets the U.S. sticker price at
Chemex, a U.S. maker of specialty chemicals, exports 40% of its $600 million in annual sales: 5% to Canada and 7% each to Japan, Britain, Germany, France, and Italy. It incurs all its costs in U.S.
During 1993, the Japanese yen appreciated by 11% against the dollar. In response to the lower cost of its main imported ingredients-beef, cheese, potatoes, and wheat for burger buns-McDonald's
In 1990, a Japanese investor paid $100 million for an office building in downtown Los Angeles. At the time, the exchange rate was ¥145/$. When the investor went to sell the building five years
Over the past year, China has experienced an inflation rate of about 22%, in contrast to U.S. inflation of about 3%. At the same time, the exchange rate has gone from Y8.7/U.S.$1 to Y8.3/U.S.$1.a.
1. Would you expect loans to SOEs to be safer or riskier than other Chinese bank loans? Explain.2. How can IPOs improve the sorry performance of Chinese banks?3. What difficulties will China face in
What are some basic differences between the financing patterns of U.S. and Japanese firms? What might account for some of these differences?
What is securitization? What forces underlie it, and how has it affected the financing policies of multinational corporations?
Why is bank lending on the decline worldwide? How have banks responded to their loss of market share?
The following questions relate to the globalization of financial markets.a. What is meant by the globalization of financial markets?b. How has technology affected the process of globalization?c. How
Why are large multinational corporations located in small countries such as Sweden, Holland, and Switzerland interested in developing a global investor base?
Why are many U.S. multinationals seeking to improve their visibility with foreign investors, even going so far as to list their shares on foreign stock exchanges?
In an attempt to regain business lost to foreign markets, Swiss authorities abolished stamp duties on transactions between foreigners as well as on new bond issues by foreign borrowers. However,
On October 14, 1993, Portugal's Ministry of Finance announced that it would scrap the 20% withholding tax imposed on the interest payments due foreigners holding government bonds. At present,
A European company issues common shares that pay taxable dividends and bearer shares that pay an identical dividend but offer an opportunity to evade taxes: Bearer shares come with a large supply of
1. What are the net proceeds to Siemens from each of these syndicated loan proposals?2. Assuming that six-month LIBOR is currently at 4.35%, what is the effective annual interest cost to Siemens for
What is the difference between a Eurocurrency loan and a Eurobond?
What is the basic reason for the existence of the Eurodollar market? What factors have accounted for its growth over time?
Why have Eurobonds traditionally yielded less than comparable domestic issues?
The following questions relate to note issuance facilities.a. What factors account for the growth of note issuance facilities?b. In what sense is the NIF part of the process of securitization?c. Why
IBM wishes to raise $1 billion and is trying to decide between a domestic dollar bond issue and a Eurobond issue. The U.S. bond can be issued at a coupon of 6.75%, paid semiannually, with

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