Questions and Answers of International Financial Management 14th

4. Twenty divisions of Union Carbide, now part of Dow Chemical, sell to thousands of customers in more than 50 countries throughout the world. The proceeds are received in the form of drafts, checks,
7. Apex Supplies borrows £1 million at 12%, payable in one year. If Apex is required to maintain a compensating balance of 20%, what is the effective percentage cost of its loan (in pounds)?
8. The Olivera Corporation, a manufacturer of olive oil products, needs to acquire €1 million in funds today to expand a pimiento-stuffing facility. Banca di Roma has offered the company a choice
9. If Consolidated Corporation issues a Eurobond denominated in Japanese yen, the 7% interest rate on the US$1 million, one-year borrowing will be 2%less than interest rates in the United States.
10. Siemens can borrow euros at 12% or pesos at 80% for one year. The peso:euro exchange rate is expected to move from €1 = Ps3300 currently to €1 = Ps4500 by year’s end.(a) What is the
1. Using data from Bloomberg, what is the relative cost of short-term borrowing for the countries listed there?Which country has the highest interest rates? Which has the lowest rates? What might
2. Based on the interest rates found on the Bloomberg website, where would you invest excess cash for the next three months? What other factors would you want to take into account besides relative
3. Go to the website of a major international bank such as BNP Paribas (www.bnpparibas.com) or Santander(www.santander.com). What treasury services does this bank provide? How can these services be
2. Suppose a U.S. parent owes $5 million to its English affiliate. The timing of this payment can be changed by up to 90 days in either direction. Assume the following effective annualized after-tax
4. Suppose a firm earns €1 million before tax in Spain.It pays Spanish tax of €0.52 million and remits the remaining €0.48 million as a dividend to its Japanese parent. Under current Japanese
5. Suppose a French affiliate repatriates as dividends all the after-tax profits it earns. If the French income tax rate is 50% and the dividend withholding tax is 10%, what is the effective tax rate
1. Based on materials found at the KPMG and Deloitte websites, what are some international tax issues that multinationals are concerned about? Which tax issues are the national tax authorities
2. Go to the website of a major international bank such as BNP Paribas (www.bnpparibas.com) or Santander(www.santander.com). What financial services does this bank provide that would be of value to
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
2. Reviewthe arguments both for and against the European Union’s “single market”. What is the empirical evidence so far?
3. Given the resources available to them, countries A and B can produce the following combinations of steel and corn:Country A Country B Steel Corn Steel Corn(tons) (bushels) (tons) (bushels)36 0 54
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 risks does GE face in its foreign operations?
4. What profit opportunities for GE can arise out of those risks?
1. .(a) What are the various categories of international firms?(b) What is the motivation for international expansion of firms within each category?
5. .(a) What is the capital asset pricing model (CAPM)?(b) What is the basic message of the CAPM?(c) How might a multinational firm use the CAPM?
8. Pattern bargaining—an age-old tradition of largely indistinguishable union contracts in an industry—is under pressure in the auto, tire and rubber, and agriculture and industrial-equipment
9. Are international firms riskier than purely domestic firms? What data would you need to address this question?
10. Is there any reason to believe that MNCs may be less risky than purely domestic firms? Explain.
11. In what ways do financial markets grade government economic policies?
1. Who are the major trading partners of the European Union? The Eurozone? Which countries are the top five exporters to the European Union? Which countries are the top five importers of European
2. Who are the major recipients of Eurozone overseas investment? Which countries are the major sources of foreign investment in the Eurozone? A good reference is the European Central Bank site.
3. Go to the websites of companies such as the ones listed here and examine their international business activity. For example, what importance do these companies appear to place on international
4. Visit the Eurostat website at http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/. What are the sectors that have added the most jobs in the last 10 year period?
5. Visit the website of Hitachi (www.hitachi.com). From the home page, visit Hitachi’s site for three other countries.What similarities and differences do you see in the products, prices, and other
1. Describe how these three typical transactions should affect present and future exchange rates:(a) Diageo imports a year’s supply of French champagne.Payment in euros is due immediately.(b) MCI
3. For each of the following six scenarios, state whether the value of the euro will appreciate, depreciate, or remain the same relative to the Japanese yen. Explain each answer. Assume that exchange
4. The European Central Bank adopts an easier monetary policy. How is this likely to affect the value of the euro and Eurozone interest rates?
5. Comment on the following headline from The Financial Times: “Bank of Japan Hints at Extending Ultra-loose Monetary Policy” (November 21, 2013).
6. In the 1995 election for the French presidency, the Socialist candidate, Lionel Jospin, vowed to halt all privatizations, raise taxes on business, spend heavily on job creation, and cut
7. On November 7, 2013 European Central Bank president Mario Draghi announced that the Governing Council had decided to lower the interest rate by 0.25%from 0.50% stating that “inflation
1. On August 8, 2000, Zimbabwe changed the value of the Zimbabwe dollar from Z$38∕US$ to Z$50∕US$.(a) What was the original U.S. dollar value of the Zimbabwe dollar? What is the new U.S. dollar
2. In 1995, one dollar bought ¥80. In 2000, it bought about¥110.(a) What was the U.S dollar value of the yen in 1995?What was the yen’s dollar value in 2000?(b) By what percentage has the yen
3. On February 1, the euro is worth $0.8984. By May 1, it has moved to $0.9457.(a) By what percentage has the euro appreciated or depreciated against the U.S. dollar during this three-month
4. In early August 2002 (the exact date is a state secret), North Korea reduced the official value of the won from US$0.465 to US$0.0067. The black market value of the won at that time was
5. On May 13, 2013, the South African rand was worth 11.7993 to one euro. By May 31, 2013, the exchange rate was 13.2174 rand to the euro.(a) By how much had the South African rand devalued against
6. At the time Argentina launched its new exchange rate scheme, the euro was trading at US$0.85 per euro.Exporters and importers would be able to convert between dollars and pesos at an exchange rate
1. Plot the nominal and real values of the euro over the past 10 years using the European Central Bank data.
2. How closely correlated are changes in the real and nominal values of the euro over this period? That is, do the real and nominal exchange rates tend to move together?
3. By how much has the euro changed in real terms over this period?
4. By how much has the euro changed in nominal terms over this period?
5. Plot the following exchange rates over the past five years: euro/yen, U.S. dollar/euro, and euro/British pound. Are these exchange rates closely correlated with one another? You can use foreign
6. Based on your review of several recent currency interventions, what reasons were given by the monetary authorities for these interventions? How much money was expended during these interventions?
7. Based on your review of The Economist, the Wall Street Journal, the South China Morning Post, and The Financial Times, which countries are currently having currency problems? What are the causes
7. 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 Deutschmark. According to a Spanish
1. During the currency crisis of September 1992, the Bank of England borrowed 33 billion Deutschmarks (DM)from the Bundesbank when a British pound was worth DM 2.78, or $1.912. It sold these DM in
2. Suppose the central rates within the ERM for the French franc (FF) and Deutschmark (DM) are FF 6.90403:ECU 1 and DM 2.05853:ECU 1, respectively.(a) What is the cross-exchange rate between the
3. A Dutch company exporting to France had 3 million French francs (FF) due in 90 days. Suppose that the spot exchange rate against the Dutch guilder (DFl) was FF1 = DFl 0.3291.(a) Under the exchange
1. Plot the U.S. dollar value of the euro since its inception.How has the euro fared in the past year?
2. What explanations have been given for the decline of the euro in the first three years of its existence?
3. What are the objectives of the ECB? What policy tradeoffs does the ECB have to consider?
4. According to the IMF, what are its main purposes?
5. What proposals have been made by the IMF to reduce the incidence and severity of international financial crises?
3. Suppose the rupiah-U.S. dollar exchange rate is fixed, but Indonesian prices are rising faster than U.S. prices.Is the Indonesian rupiah appreciating or depreciating in real terms?
4. Comment on the following statement. “It makes sense to borrow during times of high inflation because you can repay the loan in cheaper money.”
5. Which is likely to be higher, a 150% ruble return in Russia or a 15% U.S. dollar return in the United States?
6. The interest rate in the UK is 12%; in Switzerland it is 5%. What are possible reasons for this interest rate differential? What is the most likely reason?
9. What factors might lead to persistent covered interest arbitrage opportunities among countries?10. In early 1989, Japanese interest rates were about 4 percentage points below U.S. rates. The wide
11. In 2000, Eurozone interest rates were below those of the US. By 2001, this had reversed. At the same time, the euro fell against the U.S. dollar. What might explain the divergent trends in
14. British government bonds, or gilts, currently are paying higher interest rates than comparable U.S. Treasury bonds. Suppose the Bank of England eases the money supply to drive down interest
1. 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 Japanese yen-U.S. dollar exchange rate was ¥130, what should the
2. Two countries, the United States and the United Kingdom, 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
3. If expected inflation is 100% and the real required return is 5%, what should the nominal interest rate be according to the Fisher effect?
6. 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 UK interest rate is 14%. To the nearest whole
7. Chase Econometrics has just published projected inflation rates for the United States and the Eurozone for the next five years. U.S. inflation is expected to be 10% per year, and Eurozone
8. During 1995, the Mexican peso exchange rate rose from Mex$5.33∕US$ toMex $7.64∕US$. At the same time, U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%.(a) By
9. Suppose three-year deposit rates on Eurodollars and Eurofrancs (Swiss) are 12% and 7%, respectively. If the current spot rate for the Swiss franc is SFr 2.51∕$, what is the spot rate implied by
10. Assume that the interest rate is 16% on British pounds and 7% on euros. At the same time, inflation is running at an annual rate of 3% in the Eurozone and 9% in the UK.(a) If the euro is selling
11. Suppose the Eurosterling rate is 15% and the Eurodollar rate is 11.5%. What is the forward premium on the U.S. dollar? Explain.
12. Suppose the spot rates for the euro, British pound, 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
1. Using data from the OECD, compare the most recent PPP exchange rates for the euro, British pound, and Japanese yen, with their nominal exchange rates. What differences do you observe? What
2. Using OECD data, plot the PPP exchange rates for the British pound, Japanese yen, Australian dollar, and Korean won. Have these PPP exchange rates gone up or down over time? What accounts for the
3. Find the 90-day interest rates from the Financial Times website for the U.S. dollar, Japanese yen, euro, Polish zloty, Russian ruble, and British pound. Are the yield differentials on these
4. Examine forecasts from www.tradingeconomics.com for the British pound, Japanese yen, Russian ruble, and euro.(a) Which of these currencies are forecast to appreciate and which to depreciate?(b)
5. How have forward premiums and discounts relative to the U.S. dollar changed over annual intervals during the past five years for the Japanese yen, British pound, and euro? Use beginning-of-year
1. In a freely floating exchange rate system, if the current account is running a deficit, what are the consequences for the nation’s balance on financial account and its overall balance of
2. .(a) As the value of the euro rises, what is likely to happen to the Eurozone balance on its current account?Explain.(b) What is likely to happen to the value of the U.S.dollar as the U.S.
3. Suppose Lufthansa, the German airline, 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
4. .(a) What happens to Argentina’s ability to repay its foreign loans if the United States restricts imports of Argentinian agricultural produce?(b) Suppose Brazil starts welcoming foreign
5. China’s overall saving rate is now nearly 50% of GDP, the highest in the world. China’s domestic investment rate, at 43%, is also high, but not as high as its saving rate. What do these facts
8. Suppose the trade imbalances of the second decade of the 21st century largely disappear during the next decade. What is likely to happen to the huge global capital flows that currently exist? What
1. How would each of the following transactions show up on the Eurozone balance-of-payments accounts?(a) Payment of €100 million in welfare benefits to Eurozone citizens living in Costa Rica(b) A
2. Set up the double-entry accounts showing the appropriate debits and credits associated with the following transactions:(a) Bollore Group, a French agribusiness, exports€80 million of soybeans to
4. The following transactions (expressed in € billions)take place during a year. Calculate the Eurozone merchandise-trade, current-account, financial-account, and official reserves balances.(a) The
5. During the Reagan era, 1981–1988, 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. Which countries are the major customers for Eurozone of goods and services? Which countries are the major exporters of goods and services to the Eurozone?
2. Examine the Eurozone of payments over the past year.(a) What is the current-account balance, the financial-account balance, the capital-account balance, and the official reserves balance?(b) How
3. Based on historical data from the European Central Bank, what is the relationship between Eurozone trade balances and economic growth in the Eurozone?
4. What is the historical relationship between Eurozone trade balances and the value of the euro?
5. Select a country and analyze that country’s balance of payments for 8 to 12 years, subject to availability of data. You can find such data by using the Google search engine (at www.google.com)
6. For the country selected in exercise 5, analyze the exchange rate against the euro and/or U.S. dollar during the same period.(a) Is there any observable relationship between the
1. What are some indicators of country risk? Of country health?
5. Figure 6.7 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
6. Many antipoverty activists believe that what keeps incomes and living standards from rising as fast in the developing world as they have in the developed world is an international conspiracy of

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