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international financial management

Questions and Answers of International Financial Management

Integrating Country Risk and Capital Budgeting. Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Co.(in Greece) improve its performance. Tovar would need to
Risk and Cost of Potential Kidnapping. In 2004 during the war in Iraq, some MNCs capitalized on opportunities to rebuild Iraq. However, in April 2004, some employees were kidnapped by local militant
How Country Risk Affects NPV. In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent.
How Country Risk Affects NPV. Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinar; the dinar is currently valued at
Arkansas, Inc., exports to various less developed countries, and its receivables are denominated in the foreign currencies of the importers. It considers reducing its exchange rate risk by
Effects of September
Valuation of a Foreign Target. Gaston Co.(a U.S. firm) is considering the purchase of a target PROJECT COMPARISON OF 1-YEAR U.S. AND FOREIGN INTEREST RATES FORECAST METHOD USED TO FORECAST THE SPOT
Hedge Decision on a Project. Carlotto Co.(a U.S. firm) will definitely receive 1 million British pounds in 1 year based on a business contract it has with the British government. Like most firms,
Capital Budgeting Analysis. Wolverine Corp.currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess
Effects of September
Hedging with Forward versus Option Contracts. As treasurer of Tempe Corp., you are confronted with the following problem. Assume the one-year forward rate of the British pound is $1.59.You plan to
Exposure to September
Assessing Exposure. Washington Co. and Vermont Co. have no domestic business. They have a similar dollar equivalent amount of international exporting business. Washington Co. exports all of its
Changes in Economic Exposure. Walt Disney World built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate
Testing for a Forecast Bias. You must determine whether there is a forecast bias in the forward rate. You apply regression analysis to test the relationship between the actual spot rate and the
Interpreting an Unbiased Forward Rate. Assume that the forward rate is an unbiased but not necessarily accurate forecast of the future exchange rate of the yen over the next several years. Based on
IRP, PPP, and Speculating in Currency Derivatives.The U.S. 3-month interest rate (unannualized)is 1 percent. The Canadian 3-month interest rate(unannualized) is 4 percent. Interest rate parity
Effects of September
Effects of September
Indirect Intervention. During the Asian crisis, some Asian central banks raised their interest rates to prevent their currencies from weakening. Yet, the currencies weakened anyway. Offer your
Bull Spreads and Bear Spreads. Two British pound (£) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $.03 and $.04 per unit,
Currency Bull Spreads and Bear Spreads. A call option on British pounds (£) exists with a strike price of$1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike
Currency Straddles. Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $.025 per unit. A euro put option has a premium of $.017
Speculating with Currency Put Options. Bulldog, Inc., has sold Australian dollar put options at a premium of $.01 per unit, and an exercise price of $.76 per unit. It has forecasted the Australian
Speculating with Currency Call Options. Bama Corp. has sold British pound call options for speculative purposes. The option premium was $.06 per unit, and the exercise price was $1.58. Bama will
Speculating with Currency Put Options.Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $.02 per unit, with an exercise price
Speculating with Currency Call Options. LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in
Speculating with Currency Futures. Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also assume that forward contracts were available for the same
Impact of September
Effects of September
Financing with Stock. Chapman Co. is a privately owned MNC in the United States that plans to engage in an initial public offering (IPO) of stock so that it can finance its international expansion.At
Effects of Tariffs. Assume a simple world in which the United States exports soft drinks and beer to France and imports wine from France. If the United States imposes large tariffs on the French
Following the terrorist attack on the United States, the valuations of many MNCs declined by more than 10 percent. Explain why the expected cash flows of MNCs were reduced, even if they were not
Impact of September
Effective Yield of Portfolio Ithaca Co. considers placing 30 percent of its excess funds in a 1-year Singapore dollar deposit and the remaining 70 percent of its funds in a 1-year Canadian dollar
Investing in a Portfolio Pittsburgh Co. plans to invest its excess cash in Mexican pesos for 1 year. The 1-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change
Impact of September 11 Palos Co.commonly invests some of its excess dollars in foreign government short-term securities in order to earn a higher short-term interest rate on its cash. Describe how
Investing Strategy Should McNeese Co.consider investing funds in Latin American countries where it may expand facilities? The interest rates are high, and the proceeds from the investments could be
Diversified Investments Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term
Interest Rate Parity Dallas Co. has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for 1-year Treasury bills.The 1-year forward rate of the euro
Investing in a Currency Portfolio Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?
Effective Yield Assume that the 1-year U.S.interest rate is 10 percent and the 1-year Canadian interest rate is 3 percent. If a U.S. firm invests its funds in Canada, by what percentage will the
Effective Yield Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially underestimate the spot rate to be realized in 180 days.
Effective Yield Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days.
Effective Yield Rollins, Inc., has $3 million in cash available for 180 days. It can earn 7 percent on a U.S. Treasury bill or 9 percent on a British Treasury bill. The British investment does
Effective Yield Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollars to
Covered Interest Arbitrage Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage since the euro’s 90-day interest rate is higher
Investing Strategy Why would a U.S. firm consider investing short-termfunds in euros even when it does not have any future cash outflows in euros?
Investing Strategy Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the
International Fisher Effect If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from
Assume interest rate parity exists. Would U.S.firms possibly consider placing deposits in countries with high interest rates? Explain.
Assume that the Venezuelan 1-year interest rate is 90 percent, while the U.S. 1-year interest rate is 6 percent. Determine the break-even value for the percentage change in Venezuela’s currency
Assume that the 1-year forward rate is used as the forecast of the future spot rate. The Malaysian ringgit’s spot rate is $.20, while its 1-year forward rate is $.19.The Malaysian 1-year interest
Assume that the Australian 1-year interest rate is 14 percent. Also assume that the Australian dollar is expected to appreciate by 8 percent over the next year against the U.S. dollar. What is the
Country X typically has a high interest rate, and its currency is expected to strengthen against the dollar over time. Country Y typically has a low interest rate, and its currency is expected to
Financing with a Portfolio Raleigh Corp. needs to borrow funds for 1 year to finance an expenditure in the United States. The following interest rates are available:BORROWING RATE United States
Financing with a Portfolioa. Does borrowing a portfolio of currencies offer any possible advantages over the borrowing of a single foreign currency?b. If a firm borrows a portfolio of currencies,
Financing with a Portfolio Pepperdine, Inc., considers obtaining 40 percent of its 1-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian
Analysis of Short-Term Financing Jacksonville Corp. is a U.S.–based firm that needs $600,000. It has no business in Japan but is considering 1-year financing with Japanese yen because the annual
Probability Distribution of Financing Costs Missoula, Inc., decides to borrow Japanese yen for 1 year. The interest rate on the borrowed yen is 8 percent. Missoula has developed the following
Impact of Credit Crisis on Risk of Financing Homewood Co. commonly finances some of its U.S.expansion by borrowing foreign currencies (such as Japanese yen) that have low interest rates. Describe how
Financing During a Crisis Bradenton, Inc., has a foreign subsidiary in Asia that commonly obtains short-term financing from local banks. If Asia suddenly experiences a crisis, explain why Bradenton
Break-Even Financing Orlando, Inc., is a U.S.–based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a 1-year loan of 10 million pesos for operating expenses. Since the Mexican
IRP Application to Short-Term Financing Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent.
Effective Financing Rate Boca, Inc., needs $4 million for 1 year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is 3
IRP Application to Short-Term Financing Assume that interest rate parity exists. If a firm believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to achieve
Break-Even Financing Akron Co. needs dollars.Assume that the local 1-year loan rate is 15 percent, while a 1-year loan rate on euros is 7 percent. By how much must the euro appreciate to cause the
IRP Application to Short-Term Financinga. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs short-term financing?b. Assume that Connecticut Co. needs
Effective Financing Rate How is it possible for a firm to incur a negative effective financing rate?
Short-Term Financing Analysis Assume that Tulsa, Inc., needs $3 million for a 1-year period.Within 1 year, it will generate enough U.S. dollars to pay off the loan. It is considering three options:
Financing and Exchange Rate Risk How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk?
Probability Distributiona. Discuss the development of a probability distribution of effective financing rates when financing in a foreign currency. How is this distribution developed?b. Once the
Foreign Financinga. Explain how a firm’s degree of risk aversion enters into its decision of whether to finance in a foreign currency or a local currency.b. Discuss the use of specifying a
Financing from Subsidiaries Explain why an MNC parent would consider financing from its subsidiaries.
Omaha, Inc., plans to finance its U.S. operations by repeatedly borrowing two currencies with low interest rates whose exchange rate movements are highly correlated. Will the variance of the
The spot rate of the Australian dollar is $.62.The 1-year forward rate of the Australian dollar is $.60.The Australian 1-year interest rate is 9 percent. Assume that the forward rate is used to
Assume that the Japanese 1-year interest rate is 5 percent, while the U.S. 1-year interest rate is 8 percent.What percentage change in the Japanese yen would cause a U.S. firm borrowing yen to incur
Using the information in question 1 and assuming a 50 percent chance of either scenario occurring, determine the expected value of the effective financing rate.
Assume that the interest rate in New Zealand is 9 percent. A U.S. firm plans to borrow New Zealand dollars, convert them to U.S. dollars, and repay the loan in 1 year. What will be the effective
Letters of Credit Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently
OPIC Describe the role of the Overseas Private Investment Corporation (OPIC).Advanced Questions
Small Business Policy Describe the Small Business Policy.
Working Capital Guarantee Program Briefly describe the Working Capital Guarantee Program administered by the Export-Import Bank.
Impact of September 11 Every quarter, Bronx Co. ships computer chips to a firm in central Asia.It has not used any trade financing because the importing firm always pays its bill in a timely manner
Government Programs This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish so many programs?
PEFCO Briefly describe the role of the Private Export Funding Corporation (PEFCO).
Export-Import Banka. What is the role today of the Export-Import Bank of the United States?b. Describe the Direct Loan Program administered by the Export-Import Bank.
Banker’s Acceptancesa. Describe how foreign trade would be affected if banks did not provide trade-related services.b. How can a banker’s acceptance be beneficial to an exporter, an importer, and
Explain how the Export-Import Bank can encourage U.S. firms to export to less developed countries where there is political risk.
Explain the difference in the risk to the exporter between accounts receivable financing and factoring.
Explain why so many international transactions require international trade credit facilitated by commercial banks.
Project Financing Dryden Co. is a U.S. firm that plans a foreign project in which it needs $8,000,000 as an initial investment. The project is expected to generate cash flows of 10 million euros in 1
Selecting a Loan Maturity Omaha Co. has a subsidiary in Chile that wants to borrow from a local bank at a fixed rate over the next 10 years.a. Explain why Chile’s term structure of interest
Financing and Exchange Rate Risk Compton Co. has a subsidiary in Thailand that produces computer components. The subsidiary sells the components to manufacturers in the United States.The components
Financing and Exchange Rate Risk Vix Co.(a U.S firm) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Europe. It wants to purchase a
Financing and Exchange Rate Risk The parent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this
Bradenton searches for a firm with which it can swap pesos for dollars over each of the next 4 years. Briggs Co. is an importer of Mexican products. It is willing to take the 1 million pesos per year
Financing and the Currency Swap Decision Bradenton Co. is considering a project in which it will export special contact lenses to Mexico. It expects that it will receive 1 million pesos after taxes
Interest Rate Swap Janutis Co. has just issued fixed rate debt at 10 percent. Yet, it prefers to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in
Swap Agreement Grant, Inc., is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British

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