Questions and Answers of International Financial Management 14th

8 If the northern branch and the southern branch worked together, the northern branch could loan its £15 million to the southern branch. Nevertheless, one could argue that the branches could not
7 When the expected interest received by the northern branch and paid by the southern branch of Kent plc are consolidated, what is the net amount of interest received? Kent plc is a large UK firm
Based on the expected effective financing rate for the portfolio and the total amount of £15 million borrowed, determine the expected loan repayment amount beyond the principal borrowed. Kent plc is
What is the expected effective financing rate of the total amount borrowed? Kent plc is a large UK firm with no international business. It has two branches within the UK, a southern branch and a
Determine the financing portfolio composition for Kent’s southern branch that would minimize the expected effective financing rate while satisfying the restriction imposed by the parent. Kent plc
Based on the expected effective yield for the portfolio and the initial investment amount of £15 million, determine the annual interest to be earned on the portfolio. Kent plc is a large UK firm
What is the expected effective yield of the investment portfolio? Kent plc is a large UK firm with no international business. It has two branches within the UK, a southern branch and a northern
Determine the investment portfolio composition for Kent’s northern branch that would maximize the expected effective yield while satisfying the restriction imposed by the parent. Kent plc is a
Jim decided to use the excess cash to pay off the British loan. However, a friend advised him to invest the cash in British Treasury bills, stating that ‘the loan provides an offset to the pound
If Jim invests the excess cash in UK Treasury bills, would this reduce the firm’s exposure to exchange rate risk?Ever since Jim Logan began his Sports Exports Company (Ireland), he has been
Foreign currency yields. The Bloomberg website provides interest rate data for many different foreign currencies over various maturities. Its address is http://www.bloomberg.com.a Go to the section
Effective yield of portfolio. Ithaca (Greece) considers placing 30% of its excess funds in a one-year Singapore dollar deposit and the remaining 70% of its funds in a one-year US dollar deposit. The
Investing in a portfolio. Poppleton Ltd plans to invest its excess cash in South African rand for one year. The one-year South African interest rate is 19%. The probability of the rand’s percentage
Impact of a crisis. Palos SA (Spain) commonly invests some of its excess euros 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 Ltd 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 Ltd has no business outside the UK but has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term
Investing in a currency portfolio. Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?14 Interest rate parity. Trellis Ltd has
Effective yield. Assume that the one-year UK interest rate is 10% and the one-year US interest rate is 13%. If a UK firm invests its funds in the US, by what percentage will the dollar have to
Effective yield. Repeat question 9, but this time assume that the Rollins plc expects the 180-day forward rate of the dollar to substantially underestimate the spot rate to be realized in 180 days.
Effective yield. Repeat question 9, but this time assume that Rollins plc expects the 180-day forward rate of the dollar to substantially overestimate the spot rate to be realized in 180 days.
Effective yield. Rollins plc has £3 million in cash available for 180 days. It can earn 7% on a UK Treasury bill or 9% on a US Treasury bill. The US investment does require conversion of pounds to
Effective yield. Corlins plc has £1 million in cash available for 30 days. It can earn 1% on a 30-day investment in the United Kingdom. Alternatively, if it converts the pounds to South African
Covered interest arbitrage. Granville SA has 2 million euro 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 UK firm consider investing short-term funds in euros even when it does not have any future cash outflows in euros?
Investing strategy. Trumpington Ltd has £2 million in excess cash that it has invested in Mexico at an annual interest rate of 60%. The UK interest rate is 9%. By how much would the Mexican peso
International Fisher effect. If a US firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from
Leading and lagging. How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?
Netting. Explain the benefits of netting. How can a centralized cash management system be beneficial to the MNC?
International cash management. Discuss the general functions involved in international cash management.Explain how the MNC’s optimization of cash flow can distort the profits of each subsidiary.
Assume interest rate parity exists. Would European firms possibly consider placing deposits in countries with high interest rates? Explain.
Assume that the Venezuelan one-year interest rate is 90%, while the UK one-year interest rate is 6%.Determine the break-even value for the percentage change in Venezuela’s currency (the bolivar)
Assume that the one-year forward rate is used as the forecast of the future spot rate. The Malaysian ringgit’s spot rate is £0.12, while its one-year forward rate is £0.11. The Malaysian one-year
Assume that the Australian one-year interest rate is 14%. Also assume that the Australian dollar is expected to appreciate by 8% over the next year against the British pound. What is the expected
Country X typically has a high interest rate, and its currency is expected to strengthen against the pound over time. Country Y typically has a low interest rate, and its currency is expected to
Financing with a portfolio. Raleigh Ltd needs to borrow funds for one year to finance an expenditure in the United States. The following interest rates are available:The percentage changes in the
Financing with a portfolio.a 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, what
Financing with a portfolio. Pfeffer GmbH (Germany)considers obtaining 40% of its one-year financing in Canadian dollars and 60% in Japanese yen. The forecasts of appreciation in the Canadian dollar
Analysis of short-term financing. Jackson Ltd is a UK-based firm that needs £600 000. It has no business in Japan but is considering one-year financing with Japanese yen because the annual interest
Probability distribution of financing costs. Missoula Ltd decides to borrow Japanese yen for one year.The interest rate on the borrowed yen is 8%. Missoula has developed the following probability
Effects of currency change. Homewood Ltd commonly finances some of its expansion in Europe by borrowing in euros. The interest rate for the euro then increases with no prospect of a fall in value of
Financing in a crisis. What actions can a firm take with regard to its short-term financing when there are concerns that there might be a currency crisis in the country of one of its subsidiaries.
Break-even financing. Orlando plc is a UK-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos for operating expenses. Since the Mexican interest
IRP application to short-term financing. Assume that the UK interest rate is 7% and the euro’s interest rate is 4%. Assume that the euro’s forward rate has a premium of 4% (is 4% more expensive
Effective financing rate. Boca, SA (Spain) needs 4 million euros for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese
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 Ltd needs dollars.Assume that the local one-year loan rate is 15%, while a one-year loan rate on euros is 7%. By how much must the euro appreciate to cause the loan in
IRP application to short-term financing.a If interest rate parity does not hold, what strategy should Connect Ltd consider when it needs short-term financing?b Assume that Connect Ltd needs pounds.
Effective financing rate. How is it possible for a firm to incur a negative effective financing rate?
Short-term financing analysis. Assume that Tilly Ltd needs £3 million for a one-year period. Within one year, it will generate enough British pounds to pay off the loan. It is considering three
Financing and exchange rate risk. How can a UK firm finance in euros and not necessarily be exposed to exchange rate risk?
Probability distribution.a 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 financing.a 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
Omaha SA (France) plans to finance its UK 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 £0.40. The one-year forward rate of the Australian dollar is£0.38. The Australian one-year interest rate is 9%.Assume that the forward rate is used to
Assume that the Japanese one-year interest rate is 5%, while the UK one-year interest rate is 8%. What percentage change in the Japanese yen would cause a UK firm borrowing yen to incur the same
Using the information in question 1 and assuming a 50% chance of either scenario occurring, determine the expected value of the effective financing rate.
Assume that the interest rate in New Zealand is 9%.A UK firm plans to borrow New Zealand dollars, convert them to UK pounds, and repay the loan in one year. What will be the effective financing rate
Compare and contrast the web provision for exporters from the UK and the US. For the US provision visit http://www.exim.gov and for the UK provision visit http://www.ecgd.gov.
Letters of credit. Channel Traders (UK) is a firm based in Grimsby, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a
Impact of a financial crisis. What steps should Brunch take if a crisis occurs in country X which is a major exporting destination for Brunch Ltd?
Government programmes. What motivates a government to establish/intervene in the credit markets?
Should the World Bank be in charge of providing finance for exports?
Forfaiting. What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
ECGD a What is the role today of the ECGD?b Describe the basis of the political opposition to the ECGD.
Role of factors. What is the role of a factor in international trade transactions?
Banker’s acceptances.a 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 UK 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.
Long-term cost of debt. The Bloomberg website provides interest rate data for many countries and various maturities. Its address is http://www.bloomberg.com.Go to the ‘Market Data’ section of the
Interest rate swap. Janutis plc has just issued fixed rate debt at 10%. Yet, it prefers to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it
Swap agreement. Grant plc is a well-known UK firm that needs to borrow 10 million dollars to support a new business in the United States. However, it cannot obtain financing from US banks because it
Interaction between financing and invoicing policies. Assume that Hurricane plc is a UK company that exports products to the United States, invoiced in pounds. It also exports products to Denmark,
Cost of financing. Assume that Seminole plc considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7%, even though it has no incoming cash flows to cover the bond
Bond financing analysis. Hatton Ltd just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The
Bond financing analysis. Sambuka plc can issue bonds in either UK pounds or in Swiss francs.Pound-denominated bonds would have a coupon rate of 15%; Swiss franc-denominated bonds would have a coupon
Financing decision. Ivax plc (based in Germany) is a drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European
Exchange rate effects. Katina plc is a UK firm that plans to finance with bonds denominated in euros to obtain a lower interest rate than is available on pound-denominated bonds. What is the most
Financing that reduces exchange rate risk. Kerr plc, a major UK exporter of products to Japan, denominates its exports in pounds and has no other international business. It can borrow pounds at 9%to
Currency diversification. Why would a UK firm consider issuing bonds denominated in multiple currencies?
Bond offering decision. Columbia plc is a UK company with no foreign currency cash flows. It plans to issue either a bond denominated in euros with a fixed interest rate or a bond denominated in UK
Exchange rate effects a Explain the difference in the cost of financing with foreign currencies during a strong-pound period versus a weak-pound period for a UK firm.b Explain how a UK-based MNC
Risk from issuing foreign currency-denominated bonds. What is the advantage of using simulation to assess the bond financing position?
Floating rate bonds a What factors should be considered by a UK firm that plans to issue a floating rate bond denominated in a foreign currency?b Is the risk of issuing a floating rate bond higher or
Political considerations Enter the terms: ‘Financial crisis’, ‘chronology’, ‘date’ and ‘country’. Select a reasonably long article in a search engine of newspaper articles. Your
Integrating country risk and capital budgeting.Tovar Cie is a French firm that has been asked to provide consulting services to help Gredia Company(in Country Y) improve its performance. Tovar would
The risk and cost of potential kidnapping. In 2004 following the war in Iraq, some MNCs capitalized on opportunities to rebuild Iraq. However, in April 2004, some employees were kidnapped by local
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
How country risk affects NPV. Monk Ltd 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
JC Penney’s country risk analysis. Recently, JC Penney (an actual US company) decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before
How country risk affects NPV. Explain how the capital budgeting analysis in the previous question would need to be adjusted if there were three possible outcomes for the dollar along with the
How country risk affects NPV. Hoosier Ltd is planning a project in the United States. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the United
Buxton plc is thinking of investing in Country Y. The expected return is 20% with a standard deviation due to currency movements of 5%. However, ten years ago Country Y’s currency fell by 40%. How
Country risk ratings. Assauer Ltd would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below.Assauer has assigned an
Reducing country risk. MNCs such as Alcoa, DuPont, Heinz and IBM donated products and technology to foreign countries where they had subsidiaries.How could these actions have reduced some forms of
Country risk analysis. When Jerrik ApS (Danish)considered establishing a subsidiary in Zenland, it performed a country risk analysis to help make the decision. It first retrieved a country risk
9 Incorporating country risk in capital budgeting.How could a country risk assessment be used to adjust a project’s required rate of return? How could such an assessment be used instead to adjust a
Microassessment. Explain the microassessment of country risk.
Country risk analysis. Niagra Ltd has decided to call a well-known country risk consultant to conduct a country risk analysis in a small country where it plans to develop a large subsidiary. Niagra
Country risk analysis. If the potential return is high enough, any degree of country risk can be tolerated.Do you agree with this statement? Why or why not?Do you think that a proper country risk
Monitoring country risk. Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for

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