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international financial management

Questions and Answers of International Financial Management

8. Discuss the advantages and disadvantages of closed-end country funds (CECFs) relative to American depository receipts (ADRs) as a means of international diversification.
7. Evaluate a home country’s multinational corporations as a tool for international diversification.
6. Would exchange rate changes always increase the risk of foreign investment? Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.
5. Explain how exchange rate fluctuations affect the return from a foreign market, measured in dollar terms. Discuss the empirical evidence for the effect of exchange rate uncertainty on the risk of
4. Explain the concept of the Sharpe performance measure.
3. Explain the concept of the world beta of a security.
2. Security returns are found to be less correlated across countries than within a country. Why can this be?
1. What factors are responsible for the recent surge in international portfolio investment?
2. Suppose that one year after the inception of the currency swap between Centralia and the Spanish MNC, the U.S. dollar fixed rate has fallen from 8 to 6 percent and the euro zone fixed rate for
1. Suppose a Spanish MNC has a mirror-image situation and needs$2,900,000 to finance a capital expenditure of one of its U.S. subsidiaries. It finds that it must pay a 9 percent fixed rate in the
2. The website www.finpipe.com/interest-rate-swaps provides a brief description of interest rate swaps. Links at the bottom of the screen lead to other descriptions of derivative products, including
9. Ashton Bishop is the debt manager for World Telephone, which needs €3.33 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated
8. A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of€12,500,000. The British company
7. Rone Company asks Paula Scott, a treasury analyst, to recommend a flexible way to manage the company’s financial risks.Two years ago, Rone issued a $25 million (U.S.$), five-year floating-rate
5. DVR Inc. can borrow dollars for five years at a coupon rate of 2.75 percent. Alternatively, it can borrow yen for five years at a rate of .85 percent. The five-year yen swap rates are 0.64–0.70
4. A corporation enters into a five-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed rate of 9.75 percent annually on a notional amount of€15,000,000 and
3. Company A is an AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNs at six-month LIBOR + .125 percent or at three-month LIBOR + .125 percent.Given its asset structure,
2. Do problem 1 over again, this time assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7–10.8
10. Assume a currency swap in which two counterparties of comparable credit risk each borrow at the best rate available, yet the nominal rate of one counterparty is higher than the other. After the
9. A U.S. company needs to raise €50,000,000. It plans to raise this money by issuing dollardenominated bonds and using a currency swap to convert the dollars to euros. The company expects interest
8. Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75–8.10 percent annually against six-month dollar LIBOR for dollars and 11.25–11.65 percent annually against six-month dollar
7. If the cost advantage of interest rate swaps would likely be arbitraged away in competitive markets, what other explanations exist to explain the rapid development of the interest rate swap market?
6. Briefly discuss some variants of the basic interest rate and currency swaps diagrammed in the chapter.
5. Discuss the risks confronting an interest rate and currency swap dealer.
4. How does the theory of comparative advantage relate to the currency swap market?
3. Discuss the basic motivations for a counterparty to enter into a currency swap.
2. What is the necessary condition for a fixed-for-floating interest rate swap to be possible?
1. Describe the difference between a swap broker and a swap dealer.
1. San Pico is a rapidly growing Latin American developing country. The country is blessed with miles of scenic beaches that have attracted tourists by the thousands in recent years to new resort
2. The JPMorgan website www.adr.com provides online data on trading in ADRs. From this website, what are the top three most widely held ADRs by institutional investment in Asia? In Europe? Does there
1. Bloomberg provides current values of many of the international stock indexes presented in Exhibit 13.8 at the website www.bloomberg.com. Go to this website and determine what country’s stock
2. If Honda ADRs were trading at $31 when the underlying shares were trading in Tokyo at¥2,907, what could you do to earn a trading profit? Use the information in problem 1 to help you, and assume
1. On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥2,907 per share on Monday, June 6, 2016. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On June
6. Why do you think the empirical studies about factors affecting equity returns basically showed that domestic factors were more important than international factors, and, secondly, that industrial
5. Why might it be easier for an investor desiring to diversify his portfolio internationally to buy depository receipts rather than the actual shares of the company?
4. Discuss any benefits you can think of for a company to (a) cross-list its equity shares on more than one national exchange, and (b) to source new equity capital from foreign investors as well as
3. Compare and contrast the various types of secondary market trading structures.
2. As an investor, what factors would you consider before investing in the emerging stock market of a developing country?
1. Exhibit 13.8 presents a listing of major national stock market indexes as displayed daily in the print edition of the Financial Times. At www.ft.com, you can find an online tracking of these
1. It is September 1990 and Detroit Motors of Detroit, Michigan, is considering establishing an assembly plant in Latin America for a new utility vehicle it has just designed. The cost of the capital
2. In this chapter, we noted that universal banks provide a host of services to corporate clients. Wells Fargo, one of the world’s largest banks, is an example of a universal bank.Go to its website
1. Exhibit 11.5 compares the spread between the prime borrowing rate and dollar LIBOR. Go to the Bankrate website www.bankrate.com, and search for the input to calculate the current spread and the
6. The Fisher effect (Chapter 6) suggests that nominal interest rates differ between countries because of differences in the respective rates of inflation. According to the Fisher effect and your
5. Recall the FRA problem presented as Example 11.2. Show how the bank can alternatively use a position in Eurodollar futures contracts to hedge the interest rate risk created by the maturity
4. A “three against nine” FRA has an agreement rate of 4.75 percent. You believe six-month LIBOR in three months will be 5.125 percent. You decide to take a speculative position in a FRA with a
3. Assume the settlement rate in problem 2 is 6.125 percent. What is the solution now?
2. A bank sells a “three against six” $3,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest
1. Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a six-month rollover basis from a London bank. If six-month LIBOR is
10. What is a collateralized debt obligation and what effect did they have on the credit crunch?
9. What is a structured investment vehicle and what effect did they have on the credit crunch?
8. How did the credit crunch become a global financial crisis?
7. Discuss the regulatory and macroeconomic factors that contributed to the credit crunch of 2007–2008.
6. What were the weaknesses of Basel II that became apparent during the global financial crisis that began in mid-2007?
5. Briefly discuss the cause and the solution(s) to the international bank crisis involving lessdeveloped countries.
4. What is the difference between the Euronote market and the Eurocommercial paper market?
3. How does the deposit-loan rate spread in the Eurodollar market compare with the depositloan rate spread in the domestic U.S. banking system? Why?
2. Briefly discuss the various types of international banking offices.
1. Briefly discuss some of the services that international banks provide their customers and the marketplace.
1. Sundance Sporting Goods Inc. is a U.S. manufacturer of high-quality sporting goods—principally golf, tennis, and other racquet equipment, and also lawn sports, such as croquet and
1. Ford Motor Company manufactures and sells motor vehicles worldwide. Through its worldwide operations the company is exposed to all types of foreign currency risk. Its website is www.ford.com. Go
3. In Example 10.2, a forward contract was used to establish a derivatives “hedge” to protect Centralia from a translation loss if the euro depreciated from €1.1000/ $1.00 to€1.1786/$1.00.
2. Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the euro from€1.1000/$1.00
1. Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.6 in the text.
5. It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in
4. Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different from
3. Identify some instances under FASB 52 when a foreign entity’s functional currency would be the same as the parent firm’s currency.
2. How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/noncurrent method, the
1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.
1. A speculator is considering the purchase of five three-month Japanese yen call options with a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28
1. Data on currency futures can be found at the CME Group website, www.cmegroup.com. Go to the “Delayed quotes” section of this website and see which currency futures contracts have increasing
12. Use the binomial option-pricing model developed in the chapter to value the call of problem 9. The volatility of the Swiss franc is 14.2 percent
11. Use the European option-pricing models developed in the chapter to value the call of problem 9 and the put of problem 10. Assume the annualized volatility of the Swiss franc is 14.2 percent. This
10. Do problem 9 again assuming an American put option instead of a call option.
9. Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum price that a six-month American call option with a striking price of$0.6800 should sell for in
8. Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an American call (put) option with a striking price of 93 is 2.10 (2.20)
7. Using the market data in Exhibit 7.6, show the net terminal value of a long position in one 110 Sep Japanese yen European put contract at the following terminal spot prices, cents per yen: 101,
6. Using the market data in Exhibit 7.6, show the net terminal value of a long position in one 110 Sep Japanese yen European call contract at the following terminal spot prices, cents per yen: 101,
5. Do problem 4 again assuming you believe the June 2019 spot price will be $0.04491 per MXN.
4. Using the quotations in Exhibit 7.3, note that the June 2019 Mexican peso futures contract has a price of $0.05143 per MXN. You believe the spot price in June will be 0.05795 per MXN. What
3. Using the quotations in Exhibit 7.3, calculate the face value of the open interest in the September 2019 Swiss franc futures contract.
2. Do problem 1 again assuming you have a long position in the futures contract.
1. Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR. You have a short position in one contract. Your performance bond account currently has a balance of $1,700. The next
7. List the arguments (variables) of which an FX call or put option model price is a function.How do the call and put premiums change with respect to a change in the arguments
6. What is meant by the terminology that an option is in-, at-, or out-of-the-money?
4. How can the FX futures market be used for price discovery?
3. Why are most futures positions closed out through a reversing trade rather than held to delivery?
2. For a derivatives market to function most efficiently, two types of economic agents are needed: hedgers and speculators. Explain.
1. Explain the basic differences between the operation of a currency forward market and a futures market.
(c) What are the consequences of the different governance systems in the two countries? It is often mentioned that the United States has a “market-centered” corporate governance system, whereas
(b) How did the two countries come to have the particular governance systems? It is often mentioned that the United States has a “market-centered” corporate governance system, whereas Germany has
(a) Compare and contrast the corporate governance systems of the two countries. It is often mentioned that the United States has a “market-centered” corporate governance system, whereas Germany
11. An epic bribe scandal at Petrobras, a major oil company controlled by the Brazilian government, that broke out in 2015 shocked the economic and political system of Brazil.Put simply, the company
10. Explain “free cash flows.” Why do managers like to retain free cash flows instead of distributing it to shareholders? Discuss what mechanisms may be used to solve this problem.
9. It has been shown that foreign companies listed on U.S. stock exchanges are valued more than those from the same countries that are not listed in the United States. Explain why U.S.-listed foreign
8. Many companies grant stock or stock options to managers. Discuss the benefits and possible costs of using this kind of incentive compensation scheme.
7. The Cadbury Code of Best Practice, adopted in the United Kingdom, led to a successful reform of corporate governance in the country. Explain the key requirements of the code and discuss how it
6. Discuss different ways that dominant investors may establish and maintain control of a company with relatively small investments.
5. Explain “the wedge” between control and cash flow rights and discuss its implications for corporate governance.
4. Studies show that the legal protection of shareholder rights varies a great deal across countries. Discuss the possible reasons why the English common law tradition provides the strongest
3. Following corporate scandals and failures in the United States and abroad, there has been a growing demand for corporate governance reform. What should be the key objectives of corporate

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