Questions and Answers of International Financial Management 14th

2. Between 1981 and 1987, direct foreign investment in the ThirdWorld plunged by more than 50%. TheWorld Bank was concerned about this decline and wanted to correct it by improving the investment
3. 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 US$20 billion of the
5. The president of Malawi has asked you for advice on the likely economic consequences of the following five policies designed to improve Malawi’s economic environment.Describe the consequences of
1. Which country risk factors do Fitch, Moody’s, and Standard& Poor’s emphasize?
2. Pick a country (e.g., Australia, South Korea). Which is the general assessment of country risk of your chosen country? Has it increased or decreased over the past year? Which factors caused this
1. Answer the following questions using the data in Figure 7.5.(a) How many Swiss francs can you get for one euro?(b) How many euros can you get for one Swiss franc?
1. The $/€ exchange rate is €1 = $1.45, and the €/SFr exchange rate is SFr1 = €0.71. What is the SFr/$exchange rate?
2. Suppose the direct quote for the British pound in New York is 1.9110–5.(a) How much would £500,000 cost in New York?(b) What is the direct quote for U.S. dollars in London?
3. Banks acting for some of their clients have some discretion as to when they conduct the foreign exchange transactions on their behalf. Suppose that a client asks to transact €4 million at a rate
4. An investor wishes to buy euros spot (at $1.3908) and sell euros forward for 180 days (at $1.3996).(a) What is the swap rate on euros?(b) What is the forward premium or discount on 180-day euros?
5. Credit Suisse quotes spot and 90-day forward rates on the Swiss franc against the U.S. dollar of $0.7957–60, 8–13.(a) What are the outright 90-day forward rates that Credit Suisse is
6. Suppose BASF receives quotes of $0.009369–71 for the Japanese yen and $0.03675–6 for the Taiwan dollar(NT$).(a) How many U.S. dollars will BASF receive from the sale of ¥50 million?(b) What
7. Suppose the euro is quoted at 0.6064–80 against the U.S. dollar in London and the British pound s is quoted at 1.6244–59 against the U.S. dollar in Frankfurt.(a) Is there a profitable
8. As a foreign exchange trader at Sumitomo Bank, you have a customer who would like spot and 30-day forward Japanese yen quotes on Australian dollars. Current market rates are Spot
10. On checking the Telerate screen, you see the following exchange rate and interest rate quotes:Currency 90-day interest rates(annualized) Spot rates 90-day forward rates U.S. Dollar
1. Find the latest quotes for the euro, British pound, and Japanese yen. By how much did these currencies rise or fall against the U.S. dollar in the last day?
2. Have emerging market currencies generally risen or fallen in the past day?
3. What was the volume of forward contracts traded in the past year? You can use data from the BIS Annual Report to answer this question.
4. Find the currency cross rates provided by Bloomberg for the euro/British pound and euro/Japanese yen. Using these rates, calculate what the British pound/Japanese yen cross rate should be. Compare
1. On April 1, the spot price of the British pound was US$1.86 and the price of the June futures contract was$1.85. During April the British pound appreciated, so that by May 1 itwas selling for
1. On Monday morning, an investor takes a long position in a British pounds futures contract that matures on Wednesday afternoon. The agreed-upon price is US$1.78 for £62,500. At the close of
3. Suppose that Dell buys a Swiss franc futures contract(contract size is SFr 125,000) at a price of US$0.83. If the spot rate for the Swiss franc at the date of settlement is SFr 1 = $0.8250, what
5. Deutsche Bank sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is US$0.91 and the spot price of the euro at date of expiration is
6. Suppose you buy three June euro call options with a 90 strike price at a price of 2.3 (¢/€).(a) What would be your total U.S. dollar cost for these calls, ignoring broker fees?(b) After holding
7. A trader executes a “bear spread” on the Japanese yen consisting of a long 103 March put and a short 101 March put.(a) If the price of the 103 put is 2.81(100ths of ¢ / ¥), while the price
8. Apex Corporation must pay its Japanese supplier ¥125 million in three months. It is thinking of buying 20 yen call options (contract size is ¥12.50 million) at a strike price of US$0.00800 in
1. What currency futures contracts are currently being traded on the CME? Which currencies have exchange-traded options?
2. Have currency futures prices generally risen or fallen in the past day?
3. What currency options contracts are currently traded on the PHLX?
4. What are the implied volatilities of the euro and the Japanese yen over the past week and month? Are implied volatilities generally higher or lower for longer maturity contracts? Explain.
1. Assume that the spot price of the British pound is US$1.55, the 30-day annualized British pounds interest rate is 10%, the 30-day annualized U.S. dollar interest rate is 8.5%, and the annualized
2. Suppose the spot price of the Japanese yen is US$0.0109, the three-month annualized Japanese yen interest rate is 3%, the three-month annualized U.S. dollar interest rate is 6%, and the annualized
1. Suppose that the premium on March 20 on a June 20 Japanese yen put option is 0.0514 cents per yen at a strike price of US$0.0077. The forward rate for June 20 is ¥1 = $0.00787 and the quarterly
2. On June 25, the call premium on a December 25 contract is 6.65 cents per British pound at a strike price of$1.81/£. The 180-day (annualized) interest rate is 7.5%in London and 4.75% in New York.
2. What is a currency swap?
3. Comment on the following statement. “In order for one party to a swap to benefit, the other party must lose.”
5. Explain how Thales 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 Thales can lock in the interest
1. Dell Computers wants to borrow pounds, and Virgin Airlines wants to borrow U.S. dollars. Because Dell is better known in the United States, it can borrow on its own U.S. dollars at 7% and British
2. 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%
3. Suppose that Thaleswould like to borrowfixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate U.S. dollars. Thales can borrow fixed-rate yen at 4.5% or
4. At time t, Airbus borrows ¥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 Japanese yen/U.S.dollar swap with Deutsche Bank
1. What were the volumes of interest and currency swaps during the past year? How do these figures compare to those from the previous year?
2. What risk factors associated with swaps does the ISDA discuss on its website?
1. What is translation exposure? Transaction exposure?
2. What are the basic translation methods? How do they differ?
4. What alternative hedging transactions are available to a Eurozone company seeking to hedge the translation exposure of its Brazilian subsidiary? How would the appropriate hedge change if the
6. Instead of its previous policy of always hedging its foreign currency receivables, Dassault Systems has decided to hedge only when it believes the euro will strengthen. Otherwise, it will go
7. Your bank isworking with aGerman 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 can
8. Air Liquide gives its traders bonuses if their selective hedging strategies are less expensive than the cost of hedging all their transaction exposure on a continuous basis. What problems can you
10. In January 1988, Arco bought a 24.3% stake in the British oil firm Britoil PLC. It intended to buy a further US$1 billion worth of Britoil stock if Britoil were agreeable. However, Arco was
11. Sumitomo Chemical of Japan has one week in which to negotiate a contract to supply products to a Portuguese company at a euro price that will remain fixed for one year. What advice would you give
12. Scottish Salmon Farmers Ltd tells its Japanese customers that it wants to be paid in British pounds.According to its director of export marketing, this simple strategy eliminates all its currency
14. ABB recently had to put together a SFr120-million bid, denominated in U.S. dollars, to upgrade a power plant in Morocco. If it won, ABB expected to pay subcontractors and suppliers in five
1. Suppose that at the start and at the end of the year, Belford U.K., the British subsidiary of Bertrand, a Eurozone-based company, has current assets of £1 million, noncurrent assets of £2
2. Rolls-Royce, the British jet engine manufacturer, sells engines to U.S. airlines and buys parts from U.S. companies.Suppose it has accounts receivable of US$1.5 billion and accounts payable of
3. Zapata Auto Parts, the Mexican affiliate of Continental A.G. had the balance sheet shown at the foot of the previous page on January 1:(a) What is Zapata’s peso translation exposure on January
4. Walt Disney expects to receive a Mex$16 million theatrical fee from Mexico in 90 days. The current spot rate is $0.1321/Mex$, and the 90-day forward rate is$0.1242/Mex$.(a) What is Disney’s peso
5. A foreign exchange trader assesses the euro exchange rate three months hence as follows:US$1.11 with probability 0.25 US$1.13 with probability 0.50 US$1.15 with probability 0.25 The 90-day forward
8. Copares, a Eurozone-based 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 British pound is €1.5617, and
9. Gulf Air 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: $0.6433–42/SFr
10. Huileac imports olive oil from Chilean firms, and the invoices are always denominated in pesos (Ch$). It currently has a payable in the amount of Ch$250 million that it would like to hedge.
1. Go to EADS’ home page (www.eads.com) and find its latest annual report. What is EADS’ accumulated translation adjustment? Does EADS use any functional currencies other than the euro? What was
2. What are the latest IASB pronouncements dealing with currency translations?
3. Review the annual reports on the websites of three of the international companies listed in www.annualreports.com.(a) Which types of currency exposure are these companies hedging?(b) Which hedging
1. .(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
6. Mercedes Benz exports cars from Europe to the Middle East in competition with Japanese carmakers, among others. Similarly, EADS exports civil aircraft to the Middle East. However, EADS’
1. Hilton International is considering investing in a new Swiss hotel. The required initial investment is US$1.5 million (or SFr 2.38 million at the current exchange rate of US$0.63 = SFr 1). Profits
2. A proposed foreign investment involves a plant whose entire output of 1 million units per year is to be exported. With a selling price of $10 per unit, the yearly revenue from this investment
7. 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, the United Kingdom, Germany, France, and Italy. It incurs all its
9. 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
1. Is it obvious from their annual reports whether these companies are hedging their economic, transaction, or translation exposure?
2. Which currencies have these companies borrowed in besides their local currencies? Do these foreign currency borrowings offset any obvious economic exposures they have in those currencies (e.g.,
1. What are some basic differences between the financing patterns of Anglo Saxon and Continental European firms? What might account for some of these differences?
7. Why are many multinationals seeking to improve their visibility with foreign investors, even going so far as to list their shares on foreign stock exchanges?
8. List some reasons why a U.S.-based corporation might issue debt denominated in a foreign currency.
10. On October 14, 1993, Portugal’s Ministry of Finance announced that it would scrap the 20% withholding tax imposed on the interest payments due on foreigners holding government bonds. Prior to
1. What is the breakdown of currencies in which international borrowing has taken place in the past year?
2. How much money has been raised in the past year in the international bond market? Eurocurrency market? International equity market?
2. Citibank offers to syndicate a Eurodollar credit for the government of Poland with the following terms:Principal US$1 billion Maturity 7 years Interest rate LIBOR + 1.5%, reset every six months
1. How much money has been raised in the past year in the Eurocurrencymarket? Eurobond market? Euronote market? Euro-commercial market?
2. What were the currency denominations of the past year’s borrowings in the Euromarkets?
5. Compañia Troquelados ARDA is a medium-sized Mexico City auto parts maker. It is trying to decide whether to borrow U.S. dollars at 9% or Mexican pesos at 75%. What advice would you give it? What
7. United Airlines inaugurated service to Japan and wants to finance the purchase of Boeing 747s to service that route. The CFO for United is attracted to yen financing because the interest rate on
8. The CFO of Mueble de España is thinking of borrowing Japanese yen because of its low interest rate, currently at 4.5%. The current interest rate in euros is 9%.What is your advice to the CFO?
1. A firm with a corporate group debt-to-equity ratio of 1:2, an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of
4. Suppose that the cost of borrowing restricted euros is 7% annually, whereas the market rate for these funds is 12%. If a firm can borrow €10 million of restricted funds, how much will it save
5. Suppose that one of the inducements provided by Taiwan to woo Xidex into setting up a local production facility is a 10-year, US$12.5 million loan at 8% interest.The principal is to be repaid at
1. What are Standard & Poor’s latest sovereign risk ratings for France, Japan, Argentina, Brazil, Mexico, South Korea, and Sweden?
2. Based on your review of the reports appearing on the Standard & Poor’s website, what factors does S&P appear to take into account in rating a country’s debt?
3. Based on data appearing at www.bradynet.com/prices.html, describe the interest spreads over U.S.treasury bonds at which various emerging market bonds are trading.
Assume that the one-year interest rate in the U.K. is 9 percent, whereas the one-year interest in the U.S is 4%. The spot rate of the pound is $1.50. Assume that interest rate parity exists. The
Zemart is a U.S. firm that plans to establish international business in which it will export to Mexico (these exports will be denominated in pesos) and to Canada (these exports will be denominated in
Maine Co., a U.S. firm, measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters:SP = b0 + b1e + uwhere SP represents the
Ohio, Inc., considers establishing a manufacturing plant in central Asia, which would be used to cover its exports to Japan and Hong Kong. If Ohio is concerned about possible terrorism, how might
Before the Tax Cuts and Jobs Act of 2017 lowered U.S. corporate income tax rates, some U.S.-based MNCs moved their parent to another country with lower corporate tax rates in an attempt to reduce
1. Describe the capital budgeting steps that would be necessary to determine whether this proposed project is feasible, as related to this specific situation.2. Explain why there is uncertainty
Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.
Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development of a large subsidiary in Greece. In the face of Greece’s government-debt crisis, its expected cash flows and earnings from
Capital Budgeting Logic Athens, Inc., established a subsidiary in the United Kingdom that was independent of its operations in the United States. The subsidiary’s performance was well above what
Lehigh Co. established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh anticipated that future cash flows would

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