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international financial management

Questions and Answers of International Financial Management

11. Exchange rate uncertainty may not necessarily mean that firms face exchange risk exposure. Explain why this may be the case.
10. Evaluate the following statement: “A firm can reduce its currency exposure by diversifying across different business lines.”
9. Discuss the advantages and disadvantages of maintaining multiple manufacturing sites as a hedge against exchange rate exposure.
8. What are the advantages and disadvantages to a firm of financial hedging of its operating exposure compared to operational hedges (such as relocating its manufacturing site)?
7. General Motors exports cars to Spain, but the strong dollar against the euro hurts sales of GM cars in Spain. In the Spanish market, GM faces competition from Italian and French car makers, such
6. Discuss the implications of purchasing power parity for operating exposure.
5. Discuss the determinants of operating exposure.
4. Explain the competitive and conversion effects of exchange rate changes on the firm’s operating cash flow.
3. Suppose that your company has an equity position in a French firm. Discuss the condition under which dollar/euro exchange rate uncertainty does not constitute exchange exposure for your company.
2. Explain the following statement: “Exposure is the regression coefficient.”
1. How would you define economic exposure to exchange risk?
1. Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United
2. In addition to the historic currency symbols, such as, $, ¥, £, and €, there is an official three-letter symbol for each currency that is recognized worldwide. These symbols can be found at
1. A currency trader makes a market in a currency and attempts to generate speculative profits from dealing against other currency traders. Today electronic dealing systems are frequently used by
12. The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. On the basis of your analysis of the exchange rate, you are pretty confident that the spot exchange rate
11. Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering
10. Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and
8. A bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar:SFr/$ = 1.5960–70 A$/$ = 1.7225–35 An Australian firm asks the bank for an
7. Using Exhibit 5.7, calculate the one-, three-, and six-month forward premium or discount for the U.S. dollar versus the British pound using European term quotations. For simplicity, assume each
6. Using Exhibit 5.7, calculate the one-, three-, and six-month forward premium or discount for the Japanese yen versus the U.S. dollar using American term quotations. For simplicity, assume each
5. Using the spot and outright forward quotes in problem 4, determine the corresponding bidask spreads in points.
3. A foreign exchange trader with a U.S. bank took a short position of £5,000,000 when the$/£ exchange rate was 1.55. Subsequently, the exchange rate has changed to 1.61. Is this movement in the
2. Using the American term quotes from Exhibit 5.7, calculate the one-, three-, and sixmonth forward cross-exchange rates between the Australian dollar and the Swiss franc.State the forward
1. Using the American term quotes from Exhibit 5.7, calculate a cross-rate matrix for the euro, Swiss franc, Japanese yen, and British pound so that the resulting triangular matrix is similar to the
10. Over the past five years, the exchange rate between the British pound and the U.S. dollar,$/£, has changed from about 1.69 to about 1.31. Would you agree that over this five-year period, British
9. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity?
8. A CAD/$ bank trader is currently quoting a small figure bid-ask of 35–40, when the rest of the market is trading at CAD1.3436–CAD1.3441. What is implied about the trader’s beliefs by his
7. Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for
6. Why does most interbank currency trading worldwide involve the U.S. dollar?
5. What is meant by a currency trading at a discount or at a premium in the forward market?
4. How are foreign exchange transactions between international banks settled?
3. Who are the market participants in the foreign exchange market?
2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?
1. Give a full definition of the market for foreign exchange.
1. Sigma Corp.’s Location Decision Sigma Corporation of Boston is contemplating establishing a wholly owned subsidiary operation in the Mediterranean. Two countries under consideration are Spain
2. The Transfer Pricing Management Benchmarking Association conducts benchmarking studies to identify the best transfer pricing processes that will improve the overall operations of its members. Its
1. The website www.taxsites.com/international.html is a comprehensive site that provides links to many other websites. For example, go to the Worldwide-Tax link and learn about the history of
5. Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent.Additionally,
4. Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. The transfer price
3. Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y are 20 percent and 30 percent, respectively. The transfer price per unit is currently set at$1,000, but
2. The Docket Company of Asheville, NC, USA, is considering establishing an affiliate operation in the city of Wellington, on the south island of New Zealand. It is undecided whether to establish the
7. Discuss how a MNC might attempt to repatriate blocked funds from a host country.
6. What are the various means the taxing authority of a country might use to determine if a transfer price is reasonable?
5. How might a MNC use transfer pricing strategies? How do import duties affect transfer pricing policies?
4. What methods do taxing authorities use to eliminate or mitigate the evil of double taxation?
3. Discuss how double taxation on a taxpayer may result if all countries were to tax the worldwide income of their residents and the income earned within their territorial boundaries.
2. Compare and contrast the three basic types of taxation that governments levy within their tax jurisdiction.
1. Discuss the twin objectives of taxation. Be sure to define the key words.
1. American Machine Tools is a midwestern manufacturer of tool-and-die-making equipment. The company has had an inquiry from a representative of the Moldovan government about the terms of sale for a
1. The chapter indicated that banker’s acceptances were negotiable money market instruments.You might be interested in including B/As in your portfolio. Fiscal Agents Savings and Investment Centre
2. The time from acceptance to maturity on a $1,000,000 banker’s acceptance is 120 days.The importer’s bank’s acceptance commission is 1.75 percent and the market rate for 120-day B/As is 5.75
1. Assume the time from acceptance to maturity on a $2,000,000 banker’s acceptance is 90 days. Further assume that the importing bank’s acceptance commission is 1.25 percent and that the market
10. What is the difference between a buy-back transaction and a counterpurchase?
9. Discuss some of the pros and cons of countertrade from the country’s perspective and the firm’s perspective.
8. Briefly discuss the various types of countertrade.
7. Do you think that a country’s government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?
6. What is the purpose of the Export-Import Bank?
5. What is a forfaiting transaction?
4. Discuss the various ways the exporter can receive payment in a foreign trade transaction after the importer’s bank accepts the exporter’s time draft and it becomes a banker’s acceptance.
3. How does a time draft become a banker’s acceptance?
2. What three basic documents are necessary to conduct a typical foreign commerce trade?Briefly discuss the purpose of each.
1. Discuss some of the reasons international trade is more difficult and risky from the exporter’s perspective than is domestic trade.
2. Students interested in professional designations in international cash management should explore the online programs available through the Association of Corporate Treasurers website,
1.EuroNetting, an online netting company, offers a multilateral service that enables companies to run their netting efficiently over the Internet. See its website at www.euronetting.com to view its
2. Discuss the pros and cons of a MNC having a centralized cash manager handle all investment and borrowing for all affiliates of the MNC versus each affiliate having a local manager who performs the
1. Describe the key factors contributing to effective cash management within a firm. Why is the cash management process more difficult in a MNC?
2. The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich’s management
1. Dorchester Ltd. is an old-line confectioner specializing in high-quality chocolates. Through its facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout Western
1. Many articles on the importance of concessionary financing can be found on the Internet by searching under the keywords concessionary financing.
7. With regard to the Centralia case application in the chapter, how would the APV change if:a. The forecast of and/or is incorrect?Depreciation cash flows are discounted at Kud instead of id?c. The
6. Suppose that in the case application in the chapter the APV for Centralia had been −$60,000. How large would the after-tax terminal value of the project need to be before the APV would be
5. Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR10,000. The annual cash flows over the five-year economic
4. Zeda Inc., a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK 15,000,000 at a rate of 4 percent per annum.
3. The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 12 percent and its before-tax borrowing rate is 8 percent. Given a marginal tax rate of 35 percent,
2. The current spot exchange rate is HUF250/$1.00. Long-run inflation in Hungary is estimated at 10 percent annually and 3 percent in the United States. If PPP is expected to hold between the two
1. The Alpha Company plans to establish a subsidiary in Hungary to manufacture and sell fashion wristwatches. Alpha has total assets of $70 million, of which $45 million is equity financed. The
13. Discuss the conditions under which the capital expenditure of a foreign subsidiary might have a positive NPV in local currency terms but be unprofitable from the parent firm’s perspective.
12. Define the concept of a real option. Discuss some of the various real options a firm can be confronted with when investing in real projects.
11. Discuss the difference between performing the capital budgeting analysis from the parent firm’s perspective as opposed to the subsidiary’s perspective.
10. In the Modigliani-Miller equation, why is the market value of the levered firm greater than the market value of an equivalent unlevered firm?
9. What is the intuition of discounting the various cash flows in the APV model at specific discount rates?
8. What is the nature of a concessionary loan and how is it handled in the APV model?
7. What problems can enter into the capital budgeting analysis if project debt is evaluated instead of the borrowing capacity created by the project?
6. Relate the concept of lost sales to the definition of incremental cash flows.
5. What makes the APV capital budgeting framework useful for analyzing foreign capital expenditures?
4. Discuss the nature of the equation sequence, Equations 18.2a to 18.2f.
3. Discuss what is meant by the incremental cash flows of a capital project.
2. What is the intuition behind the NPV capital budgeting framework?
1. Why is capital budgeting analysis so important to the firm?
1. You are the controlling shareholder of Dragon Semicon based in Taiwan, a company with a strong growth potential. In order to fund future growth, you are considering listing the company stock
13. Under what conditions would you recommend that the foreign subsidiary conform to the local norm of financial structure?
12. Under what conditions will the foreign subsidiary’s financial structure become relevant?
11. Explain how the premium and discount are determined when assets are priced to market.When will the law of one price prevail in international capital markets even if foreign equity ownership
10. Explain the pricing-to-market phenomenon.
9. Discuss foreign equity ownership restrictions. Why do you think countries impose these restrictions?
8. Discuss what factors motivated Novo Industri to seek U.S. listing of its stock. What lessons can be derived from Novo’s experiences?
7. Suppose there exists a nontradable asset with a perfect positive correlation with a portfolio T of tradable assets. How will the nontradable asset be priced?
6. Discuss how the cost of capital is determined in segmented versus integrated capital markets.
5. Define and discuss indirect world systematic risk.
4. In what sense do firms with nontradable assets get a free ride from firms whose securities are internationally tradable?

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